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Monday May 1, 2006 - 10:42:02 GMT
Black Swan Capital - www.blackswantrading.com

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Sell the $ with impunity?

Quotable
"Basic economic theory suggests that demand falls as prices go up. But in the case of speculative markets, the opposite seems to be true."

Mark Faber

FX Trading

The natives are getting restless as they pummel the US dollar with seeming impunity. The structural arguments are again rushing to the top of the list—central bank reallocation, deficits, etc.—for dollar perma-bears to serve up as an “I told you so.” And, the fact of the matter is, the dollar perma-bears may be right. But then again, they may be wrong—again!

On the “no more rate hike view” we give you this from the Financial Times on Saturday [our emphasis]:

“[I]t is easy to imagine a scenario in which US growth could overshoot forecasts, perhaps because of a stronger than expected resilience in the housing market. It is equally possible to envisage a sharper than predicted slowdown - for example, if the accumulated lag of previous interest rate rises started to feed into a more rapid cooling in property prices. The risks to monetary policy, in other words, are both on the downside and the upside - although probably more on the upside at this stage.

“It is at such inflection points in the economic cycle that management of expectations is most critical - and also most difficult.”

On the topic of central banks reallocating out of dollars, we were sent this tidbit from a Stratfor.com (www.stratfor.com ) reader [our emphasis]:

“There are other forces binding the two countries [China and the US] together as well. The most important is Chinese money -- which is flowing out to other countries precisely because China is no longer a particularly attractive place for Chinese investment. There is serious capital flight under way, as money is redeployed to safer havens. The safest haven from the Chinese point of view is the United States -- thus, Chinese investment there is surging. And the United States needs this money. In this sense, both countries are in a death-lock. There is no other economy that is as large, liquid and safe as the American economy. Chinese investors need their funds to be in the United States. And there is no larger pool of cash than China's to finance U.S. debt.

And although the Germany recovery seems for real, we know Euro-zone growth forecasts aren’t always what they’re cracked up to be.

So, no doubt this move in the dollar may turn into a rout, as sentiment is ultimately a powerful driver in this self-feeding price-led game of currency trading. And if it continues, we need to be there. So sell the buck if you see fit. But keep in mind, the cyclical fundamental arguments, which have been the driver for the dollar over the past couple of years, appear underrated. When they become extremely underrated, that will be the time to start looking in the other direction.

--------------------

And one more thing before we go this morning that you may find interesting…this was sent to me by a friend of Currency Currents (DWL are his initials). He is a Princeton educated PhD in economics. And he often throws me a line when I wade too far out into the deep-end on economics—which is quite often. These were his comments after Fed Chairman Ben Bernanke spoke last week:

A Few Words from Chairman Ben...with emphasis added:

INTEREST RATES

Ben:
Of course, inflation expectations will remain low only so long as the Federal Reserve demonstrates its commitment to price stability.

DWL:
If the core price indexes accelerate, the fed will tighten. (N.B.: If inflation declines, then US real rates will rise further above euro-zone real rates.)

Ben:
after its March meeting, the FOMC noted... the possibility that core inflation might rise as a risk to the achievement of its mandated objectives, and it judged that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In my view, data arriving since the meeting have not materially changed that assessment of the risks. To support continued healthy growth of the economy, vigilance in regard to inflation is essential.

DWL:
Therefore, given current data, it is likely that there will be further rate hikes.

Ben:
at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings

DWL:
...but those further rate hikes may not be at the next meeting. Therefore, do not infer a policy change from the first FOMC meeting without a rate hike.

DEFICIT

Ben:
"it is likely that current account imbalances will be resolved gradually over time"

DWL:
there is no urgent problem here

PS.

Next target: euro to 1.16 before 1.30.

---------------------------------------------------------

Jack Crooks
Black Swan Capital

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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

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  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



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