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Monday July 3, 2006 - 10:10:59 GMT
Black Swan Capital - www.blackswantrading.com

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Being a bit contrarian

Quotable

“When it's a question of money, everybody is of the same religion.”

Voltaire


FX Trading – Being a bit contrarian


Everybody knows the story: Sell the dollar on a weak Fed and slowing US economy. The problem may be that everybody knows the story.

You have probably read lots of versions of that story already today. Being of the skeptical bent by nature, we constantly ask ourselves where’s the edge in knowing what everyone else knows. Often the consensus is right. But we still think it’s useful to develop plausible scenarios that might suggest they (or we) are wrong.

Admittedly there is that sweet middle zone where it makes sense to be part of the consensus and riding the trend i.e. the crowd is right in the middle and wrong at the ends. This is usually the longest and most profitable segment of the trend. Sentiment is validated by the fundamentals, said validation leads to more money being committed, leading to further price-led validation, and so on…

Last Thursday’s Fed action emboldened the crowd. Euro 1.40 is already be mentioned by some out loud over the weekend. But we haven’t seen any follow-through today—something we would expect on a wholesale move, we think. And we didn’t see any follow-through in the stock market on Friday after Thursday’s blowout. And though bonds are up about a point since last Wednesday’s pre-Fed low, it’s no blowout rally yet.

Two questions and two answers that still give us pause even though we are longer term bearish on the buck:

1) Q: Are rationales crystallized that quickly? A: Sometimes. But often we see knee-jerk reaction, mini-shakeout to add some doubt, then orderly conversion to the trend, then capitulation.

2) Q: Is there anything left in the background that can support the dollar even if the crowd is right about the Fed? A: Yes. It’s the so-called “risk reduction” trade. With rates going higher elsewhere the move out of emerging markets may not be over till it’s over. And that would mean more money coming home to hide in the dollar from fund managers. We have shown these numbers from Morgan’s Stephen Jen before, we think they are worth showing again [our emphasis]:

“…in discussing possible fund flows that may have affected the dollar, investors may have been too fixated on what the Asian central banks may or may not have done with their foreign reserves, and lost track of what the US real money accounts were doing. With US$17.7 trillion under management as of end-2005 (by end-1Q06, this total rose to US$18.6 trillion), the US real money accounts are seven times larger than the Asian central banks (with US$2.7 trillion in total foreign reserves). The size of funds under management by the US mutual funds, life insurance companies and pension funds overwhelm, as an aggregate, the total official reserves of the Asian central banks. What the Asian central banks do is important, but what the US real money accounts do is really important.”

It’s something to think about at least.

We get a look at June ISM today and jobs on Friday.

Jack Crooks, Black Swan Capital
Black Swan Subscription-based Service

 

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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."



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