Wednesday October 10, 2007 - 17:21:04 GMT
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Black Swan Capital - www.blackswantrading.com
FX Trading â€“ Competing themes
1) Risk appetite â€“ the driver now it seems
Emerging market liquidity
Carry back in vogue
2) Risk Aversion â€“ waiting in the tall grass
Financial bubbles pop
Global growth become suspect
I think many would agree that currency rates and underlying fundamentals are a bit out of whack.
But this is part and parcel to the offshoot characteristics in all markets, especially currencies. I say especially currencies because there are so many viable rationales competing for attention, and each player riding the trend is very confident in either consensus or personal rationales. Until these rationales are shaken by real fundamental events, which often are recognized after the trend has already changed.
A third possible theme has emerged of late: Central bank intervention to sell euro and buy dollar (maybe some yen why they are at it). This is because the euro is taking it from all sides. Why should euro manufacturers bear the brunt of currency imbalances they say? Good question, we say!
Three of the four major global exporters in the world are the US, Japan, and of course that upstart in the eastâ€”China. All three currencies are in the proverbial toilet compared to the euro. Now the US economy is nothing to brag about, so maybe a lot of justification there. But Japan still has plenty of momentum, and that momentum may be because China continues to blow and go. Both currencies are HUGELY undervalued compared to the euro. Heck theyâ€™re even undervalued relative to the lowly dollar.
But, because we and many others are already talking about intervention, it probably wonâ€™t happen. I should say, happen at least yet. Maybe 1.50 on the euro will do the trick. And 1.50 on EURUSD I donâ€™t imagine there will be any dollar bulls left to hope for the best.
Black Swan Capital
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