Thursday March 30, 2006 - 11:45:28 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
Is it the curve?
â€śThe race is not always to the swift, nor the battle to the strong, but that's the way to bet.â€ť
FX Trading â€“ Is it the curve?
Interesting that we got no follow through yesterday on the dollar-induced Fed move from Tuesdayâ€¦It wasnâ€™t â€śgood price action relative to the news.â€ť Often, that piece of information is all you need in order to pull the trigger on a trade. This morning the buckâ€™s on the defensive. What changed? What happened to the yield differential story?
Is the yield story being overtaken by the US slowdown story which implicitly implies the Fed has gone too far already? It makes sense to us and is a theme we are warming too. We warm to it because we think the yield curve is telling us something, despite Fed Chairman Bermankeâ€™s best efforts to explain why itâ€™s â€śdifferent this time.â€ť
Below is an excerpt [our emphasis] of a commentary by Frank Shostak, adjunct scholar of the Mises Institute, Bernanke's Yield Curve Confusions. We think Mr. Shostak nails it!
â€śWhenever the Fed reverses its monetary stance, which manifests itself through the change in the shape of the yield curve, the effect of this change in the stance doesn't assert itself immediately on the entire economy. The effect of a change in monetary policy shifts gradually from one market to another market. It is this that prompts the change in the shape of the yield curve to be seen as a leading indicator of economic activity.
â€śFor instance, when during an economic expansion the Fed raises the fed funds rate target, which causes the narrowing in the yield spread, the initial effect is minimal for economic activity is still dominated by the previous easy monetary stance. It is only later on, once the tighter stance begins to dominate the scene, that economic activity begins to weaken.
â€śNotwithstanding Bernanke's view, we can conclude that the currently observed flattening or near inversion of the yield curve is an indication of a tighter Fed stance that is likely to undermine various activities that sprang up on the back of the previous easy monetary policy. In short, a flattening or the inversion of the yield curve is likely to result in an economic slowdown.
â€śThis conclusion is also supported by the visible fall in the growth momentum of money AMS. Our monetary analysis indicates that the growth momentum of economic activity, as depicted by real GDP is likely to weaken visibly in the months ahead. In fact the yearly rate of growth in Q4 is forecast to fall to 2.4% from 3.2% in Q4 last year. Given the possibility that the micro-foundation of the US economy is severely dislocated on account of the previous aggressive lowering of interest rates by the Fed, it will not surprise us if the economic slowdown is going to be much more severe than what we currently envisage.
Black Swan Capital Subscribe to the Black Swan Letter
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."