Friday May 11, 2007 - 10:43:35 GMT
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Black Swan Capital - www.blackswantrading.com
Know your reasons and your risk
â€˘ The worst has passed in the economic slowdown, economists said in the latest WSJ.com forecasting survey. But growth in 2007 is still on track to be the weakest since 2002. (WSJ)
â€˘ China's trade surplus rebounds in April.
â€˘ Standard Chartered chief economist Stephen Green said [Chinese] market capital is now worth more than 70 percent of China's gross domestic product. "This means there will be a major economic impact if there was a correction of 30 percent today, with the pain concentrated among small investors," Green said. (The Standard)
â€˘ Key Reports Due (WSJ):
8:30a.m. April Producer Price Index. Expected: +0.6%. Previous: +1.0%.
8:30a.m. April PPI, Ex-Food And Energy. Expected: +0.2%. Previous: Unch.
8:30a.m. April Retail Sales. Expected: +0.4%. Previous: +0.7%.
8:30a.m. April Retail Sales, Ex-Autos. Expected: +0.4%. Previous: +0.8%.
8:30a.m. March Business Inventories. Expected: +0.3%. Previous: +0.3%.
â€śFirst, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you canâ€™t quantify reward, you can quantify risk.â€ť
FX Trading â€“ Know your reasons and your risk
If we move from Larry Hiteâ€™s comments about quantifying risk, the current alignment of asset markets suggests there may be some significant trend changes in the currency market once risk returns. We say that because of the seeming correlation of so many different asset classes. It seems the common thread tying these together is liquidity. And it seems the liquidity is still predicated on optimistic assumptions about global growth, which in turn seem predicated on the growing idea of â€śdecouplingâ€ť from the U.S. as the driver.
Below is a chart showing the Nikkei (black line), the yen (red line), and gold (blue line) showing some decent correlation. It makes you wonder if there will be such a thing as â€śdecouplingâ€ť of economic performance when asset classes are this tightly â€ścoupled.â€ť After all, asset markets are the repositories of collateral on which liquidity is based.
Nikkei (black), yen (red), and gold (blue) daily chart:
We all watch China now for clues that maybe some of this liquidity will be drained from the system. Everyone seems to know the game, weâ€™ve seen it before. Bubbles end badly. It will in China. And it seems the play with be the yen. But itâ€™s a decent probability the dollar catches a giant bid if U.S. based international fund managers recognize their risk and run home for safety. Nothing really new here, and we have nothing new to add on the timing thingâ€”no one ever does. But, weâ€™d sure like to be there when risk rears its cleansing head and teaches its inevitable lesson of hubris.
(Japanese yen daily chart next pageâ€¦)
Japanese yen USDJPY Daily:
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