Thursday May 4, 2006 - 09:55:50 GMT
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Black Swan Capital - www.blackswantrading.com
Does it matter for the $?
"The wild geese do not intend to cast their reflection;
The water has no mind to receive their image.â€ť
Zenrin poem, The Way of Zen
Bond traders see itâ€¦
â€śTreasury prices fell in response to data that are again driving questions about whether the economy is poised to slow down, as many forecasters and Federal Reserve officials expect. Slowing economic momentum has been the key to the consensus view that the Fed will execute next week what is likely its final interest-rate increase of a two-year-old campaign.
â€śThat expectation has been nothing but tested, as a wide range of data has surprised to the upside. The good news has arrived amid inflation data that are near the top end of the central bank's range of tolerance. This is raising expectations that the central bank will have to lift rates more than expected, establishing a bearish mood among bond traders,â€ť the Wall Street Journal reported this morning.
But it doesnâ€™t seem to matter to currency traders.
It of course, is strong US economic data. Bonds are tanking on the news; the dollar is too.
Does it suggest the game has switched from yield differential to dollar revulsion no matter what? Or are expectations THAT high for Euro and Japanese growth?
Or is it that higher long-term rates are self-fulfilling i.e. preparing fertile ground for the expected US slowdown that hasnâ€™t appeared in the data?
Below a chart of the T-bond futures vs. the US $ Index:
On the dollar revulsion front:
â€˘ Geopolitical turmoil and potential quagmire seems to grow by the day for the US, suggesting safe haven outside the dollar makes sense
â€˘ Expectations of overwhelming US structural problems are feeding into sentiment with ever tick lower in the buck
â€˘ The numbers suggests there are plenty of dollar bulls to be converted to this dollar down trend
Today we get the BOE and ECB rate decisions. Tomorrow we get US Non-farm Payrolls for April.
Is the trend our friend? And does it matter? We will likely find the answers soon.
Jack Crooks, Black Swan Capital
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