Sunday January 7, 2007 - 15:29:09 GMT
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Black Swan Capital - www.blackswantrading.com
A liquidity rethink as the New Year unfolds?
â€˘ Employers in the U.S. added more workers than forecast last month and wages jumped. (Bloomberg)
â€śI have enough money to last me the rest of my life, unless I buy something.â€ť
FX Trading â€“ A liquidity rethink as the New Year Unfolds?
A surprising dynamic may be unfolding in the New Yearâ€”some liquidity might be draining off the global economy. So bets on full steam ahead on stocks, commodities, and the dollar just as last year, are in the process of a minor rethinkâ€”it could turn into a major one.
I say the term â€śdraining offâ€ť lightly however, for there are still some very large buckets of money out there. My comment is based on some anecdotal evidence we are seeing in the marketâ€”notably the move in the yen, and supported by the fall in commodities, energy, and pull-back in the key commodity dollars (Aussie and New Zealand to be specific).
The main catalyst is US economic growth. The view the Fed will cut sooner, rather than later, is becoming increasingly clouded because of some surprising strength in the US economy.
Playing in supporting roles in this â€śliquidity drainâ€ť episode are: The European Central Bank, itâ€™s on the hiking train, the Bank of England, will likely hop on board, China, announcing it may try, yet again, to slow its runaway locomotive with higher reserve requirements, and the Bank of Japan, suggesting it will fire up the interest rate engine.
The market result: gold is tanking, oil is getting whacked, stocks looking ozone-ish (made that on up) and getting hit hard today, bonds are lower, the dollar is rocking higher, and the yen is in rally mode. Yes, let me write that again in case you thought it was a typoâ€”the Japanese yen is in rally modeâ€”while the high-yieldersâ€™, Aussie and New Zealand are getting spanked.
The infamous yen carry-trade, borrowing yen and buying high yielding stuff, has been about two thingsâ€”low interest rates in Japan and plenty of liquidity elsewhereâ€”both play a role. And let us not forget, extremely low currency market volatility has played a big role. At least two of the three, liquidity and volatility, may be changing and it seems the hedge funds are recognizing that fact.
The chart below is the Australian dollar â€“ Japanese yen cross-rate. I refer to this as the â€śPoster Childâ€ť of liquidity rethink. I think itâ€™s fair to say the Aussie has benefited from both the commodities run and yen carry-trade. Both are a liquidity game at the core.
And Kiwi is racing lowerâ€¦
Maybe itâ€™s all just little correction to shakeup and shakeout the consensus (which includes us). Or maybe things are a changingâ€¦so far itâ€™s shaping up to be a very interesting year.
Jack Crooks, Black Swan Capital
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