Wednesday April 19, 2006 - 09:58:41 GMT
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Black Swan Capital - www.blackswantrading.com
A combo sandwich of cyclical and structural
â€śYou see what comes of not being able to wait without purpose in the state of highest tension. You cannot even learn to do this without continually asking yourself: Shall I be able to manage it? Wait patiently, and see what comesâ€”and how it comes!â€ť
Master Kenzo Awa, Zen in the Art of Archery
FX Trading â€“ A combo sandwich of cyclical and structural
Is the dollar getting hit on cyclical (read US consumer) and/or structural concerns?
Itâ€™s no matter if youâ€™re riding the buck lower; that means you are doing right. But in the world of rationalization in which we reside, it seems the comfort factor is enhanced when we can apply cause and effect.
Our short answer to why the dollar is getting whacked: The market believes the yield differential favoring the buck has peaked. And if the yield differential has peaked, then the US will have trouble attracting the billions and billions it needs to fund its deficit.
Thus, it seems a combo sandwich of cyclical and structural concerns. Why else such a tepid bounce after 15 Fed rate hikes?
Is the market right? Yesâ€”it always is. The question is: Is the market right for the wrong reasons? That is worth watching.
â€śGiven the three challenges outlined above [energy, interest rates, and housing hitting Mr. Consumer], however, we expect that a period of relative softness in consumer spending lies immediately ahead. The deceleration likely will cap Treasury yields for now, may give the Fed a reason to pause in its tightening campaign, and promote a slightly weaker dollar. In the event, the pessimists and even consensus seers will probably conclude that the long-overdue slowdown has arrived. We think they will be wrong again: The deceleration should be temporary, as the headwinds turn out less threatening than feared, and income gains reassert their primacy over spending trends,â€ť writes Richard Berner of Morgan Stanley.
For now, letâ€™s keep it simpleâ€”the trend is your friend no matter the reasons.
Black Swan Capital
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