Monday September 24, 2007 - 10:47:29 GMT
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Black Swan Capital - www.blackswantrading.com
China goes, so goes the dollar?
8:30a.m. Aug Chicago Fed Natl Activity Index. Previous: -0.10.
10:30a.m. Sep Dallas Fed Mfg Production Index. Previous: 21.6.
â€śLow core inflation will give the Fed latitude to ease monetary policy further if necessary to limit downside economic risks. But those reflationary policies and the uncertainty in the outlook will continue to drive some traditional inflation gauges higher. And global growth is still strong, supporting demand for commodities, especially energy. Thus, investors should continue to bet on higher volatility, steeper yield curves, a weaker dollar, rising commodity prices, and further increases in inflation breakevens.â€ť
FX Trading â€“ China goes, so goes the dollar?
When does low core inflation morph into real inflation?
Talk about between a rock and a hard place? The dollar continues to edge closer to the cliff. The Fed is banking on low core inflation as justification for additional rate cuts. Something may not wash here.
If the buck breaks down into overshoot territoryâ€”the Treasury (though the Fed) will have to muster some real defense, not just the usual sheepish pronouncement, â€śWe maintain a strong dollar policy.â€ť Thus, the dollar could lead rates higher.
Higher US rates might exact more pain for the US economyâ€”further endangering growth and further solidifying the view that global growth is decoupling. Which would of course not be good for you know whoâ€”the dollar.
And there is the odd chance that in the midst of this, we could see China give the world what it wantsâ€”a much faster increase in the value of its currency. Why? Inflation is ramping up quickly. And inflation in China is a serious social problem, more so than in the West because a much greater percentage of the average budget for a Chinese family goes toward those things inflating the fastestâ€”food, energy, housing, etc. [A interesting piece on Chinese inflation from the Sydney Morning Heraldâ€”thanks Colin!]
And of course, if the Chinese do finally allow a much faster increase in the value of their currency, their need for holding US dollar reserves will likely shrink (i.e. much of the reserve build comes from the pegging process). And dollar for dollar they can buy more oil with a stronger currency (and every other major raw material they inputâ€”including pigs). At minimum, if this plays out, it could be yet another sentiment hit to the dollar.
But, if for some reason (political, environmental, financial) China stumbles in here, the dynamics for the buck could change quickly. For it seems China is the key to the global growth story. Relative bad news from the UK hasnâ€™t done it. A big slowdown in the euro-zone services reported last week hasnâ€™t done it. Japanese political turmoil hasnâ€™t done it.
So, you know the old saying, as China goes, so goes the dollar.
Black Swan Capital
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