Wednesday October 31, 2007 - 12:10:25 GMT
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Black Swan Capital - www.blackswantrading.com
Are you ready for this ...
FX Trading ‚Äď Are you ready for this‚Ä¶
Rock in a hard place! Damned if they do, and damned they don‚Äôt! We think that sums up the position of the Fed today. Our coin is in the air.
Is it 25-basis points and sell the dollar?
Or is it 50-basis points and sell the dollar?
Man, what a time for a surprise! This statement from the Fed today would do the trick:
‚ÄúMe and my homies have decided we‚Äôve juiced these financial markets enough. It‚Äôs about time for some tough love. So we‚Äôve decided to keep interest rates on hold. We gave you guys 50-basis points last time‚ÄĒdon‚Äôt be so greedy.‚ÄĚ
As we said yesterday, there is a thin veneer separating an orderly dollar decline from an outright dollar panic. We saw this piece in the Financial Times yesterday, ‚ÄúHistory‚Äôs warning about the price of money,‚ÄĚ written by Manuel Hinds and Benn Steil, that sums up the concerns very well:
‚ÄúSo, are our cheaper dollars now at the right price? In the coming months, all eyes will be on the consumer price index for the answer.
‚ÄúUnfortunately, there are circumstances in which excessive monetary creation can destabilise the economy while the rate of CPI inflation remains low. These tend to be present when the danger of monetary destabilisation is at its highest because people have lost faith in the ability of money to keep its value through time.
‚ÄúAs one of the great monetary economists of the last century, Jacques Rueff, pointed out in the late 1960s, people react to the ‚Äėgrowing insolvency‚Äô of a reserve currency, such as the dollar, by acquiring ‚Äėgold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity‚Äô. Sounds familiar? Indeed, this is the story of our present decade, one in which alternatives to the dollar as a store of value have soared even while the CPI has remained subdued.
‚Äú‚Ä¶Following the 2001 dotcom crash, resources flowed into real estate, foreign exchange and commodities, while CPI inflation remained modest. In 2007 the housing bubble finally burst, causing credit to crunch as the market struggled to out the owners of dud mortgages and mortgage-linked contracts. The Fed reacted with cheaper dollars, which did precisely nothing in that regard. Credit risk fears remain unabated. But the market duly dumped dollars for harder assets, pushing the euro, shares, oil and gold to record dollar prices.‚ÄĚ
Just in case you missed it: ‚ÄúThe Fed reacted with cheaper dollars, which did precisely nothing in that regard. Credit risk fears remain unabated.‚ÄĚ Hmmm‚Ä¶
I think we will find out today if the home boys agree!
Black Swan Capital
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