Thursday August 10, 2006 - 10:45:23 GMT
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Black Swan Capital - www.blackswantrading.com
Is the Fed pause bad for the buck?
â€śShort the industry which the majority of Harvard Business School want to join.â€ť
FX Trading â€“ Is the Fed pause bad for the buck?
I donâ€™t watch television during the trading day because I find it distracting. But, I do flip on CNBC during key economic releases and announcements. Tuesdayâ€™s Fed rate announcement was such an occasion. Ron Insana, who seems to be one of the better commentators on the show, made a great point just after Fed announcement. To paraphrase, he said: If the Fed raises rates and kills the economy, thatâ€™s not good for the dollar. Raising rates doesnâ€™t always protect a currency. Sometimes it leads to an attack on a currency. Bingo!
This goes to the point that currency action isnâ€™t always about interest rates, even though we know yield differential is a key fundamental driver. Sometimes currencies lead interest rates, sometimes they follow.
Back to the flip side of Mr. Insanaâ€™s point; if the Fed IS right about inflation being a late cycle event that will be controlled by decelerating growth AND its action to pause does allow for US growth to continue, albeit at a bit slower speed (i.e. housing doesnâ€™t crater) AND we consider the relative yield differential in the dollar is still very competitive, then just maybe the buck donâ€™t look so bad after the dust settles.
And thereâ€™s one more thing lingering in the background that weâ€™ve seen recently: the so-called risk-reduction trade i.e. the flight from emerging equities and bonds and other risky â€śoffshoreâ€ť levered investments, which effectively leads to US fund manages bringing some money home for safekeeping; itâ€™s dollar supportive. And US fund managers do have a LOT of money out there to bring home if they so choose:
â€ś[S]o much fixation on what central banks may or may not have done has distracted us from monitoring what the private funds have been doing. I personally suspect that the US real money accounts (with US$18.6 trillion under management) have done more USD diversification in the last three years than anyone else. The dollar is in fine shape, from a structural perspective, because the private sector is more underweight the dollar than the central banks are overweight the dollar. The marketâ€™s fixation on the latter is not a balanced view,â€ť writes Stephen Jen of Morgan Stanley.
A very astute trader has been writing to me lately. He is expecting a bull market in the buck to materializeâ€”at least a move that is very tradable. He simply writes and says: â€śHow do you like you USD BULL, rare, medium, or well done?â€ť
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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