Friday July 20, 2007 - 11:28:22 GMT
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Black Swan Capital - www.blackswantrading.com
Momentum! Is it HY*Greed?
â˘ China raised interest rates for the third time since March. The benchmark one-year lending rate will increase to 6.84 percent -- the highest in more than eight years -- from 6.57 percent, starting tomorrow. (Bloomberg)
â˘ U.K. economic growth unexpectedly quickened in the second quarter as manufacturing rebounded. (Bloomberg)
Key Reports Due (WSJ):
There are no economic indicators scheduled for today.
âThere are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.â
Fred Schwed from Where Are the Customers' Yachts?
FX Trading â Momentum! Is it HY*Greed?
Legendary trader Jesse Livermore is quoted as saying, âWhen it comes to trading its better to do right than be right.â Thereâs a lot of wisdom in that wise little quip. Lately, weâve spent a lot of effort trying to âbe rightâ about the yen. Whether or not is undervalued, as we believe, is no matter. What matters is price action when it comes to the important part of thisâmaking money.
And price action in currencies it seems has become a momentum game for some pairs. Itâs reminiscent of the 1999 Nasdaq. The Aussie has closed higher 10-days in a row; Kiwi is up 17 of the last 25 days (sharply higher on many of those). The momentum players have been rightâno matter if that makes sense or not.
But remember, the momentum players were right in 1999 too, as they rode the internet craze with supreme confidence. Woody Dorsey so perfectly coined this period âE*Greed.â Are we in the midst of the âhigh yield currency greedâ (HY*Greed) era? If so, we think the culprit is liquidity.
The question: Are there analyzable factors shaping up to suggest the currency momentum game driving HY*Greed may change? Hereâs a short list of potentials:
1) Central banks keep hiking (China tomorrow and Japan is due)
2) Lending standards keep tightening (E.G proof of job required for loan)
3) Derivatives fear spreads (JP Morgan announces more exposure than so far admitting)
4) Cost of private equity money keeps rising (who ends up holding the bag when this game ends)
In short, if this stuff proves true, we would expect global liquidity to fall. And if global liquidity falls, we would expect momentum in the currency market to fall along with it. And one of our favorite short candidates in that environment is New Zealand $ - Swiss franc.
The trend is still the friend of the momentum crowd, so extreme patience is required here, as fundamentals donât matter much when it comes to momentum. But as we said, if for some strange reason there are limits to global liquidity, just maybe fundamentals will matter again. But change takes time and has various phases.
âSometimes what seems to be a new idea may actually be just the recognition on a wider scale of an already developing idea. The âbreakoutâ movement occurs when the new paradigm, already almost completely formed, achieves a burst of recognition usually associated with particularly poignant tipping points.â [Our emphasis]
When I typed âhigh yielding currenciesâ into Google this morning I got 2,080,000 results. HmmâŚ!
Have a great weekend!
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