World Currency Watch: FOREX Market, FOREX Trading BLOG

A New Dynamic?

Key News
• Paulson, Lagarde, Divided on Dollar, Unite to Seek Higher Yuan From China –Bloomberg
• Pound Gains Against Euro; Report Shows Economy Grew Faster Than Forecast –Bloomberg
• Australian, New Zealand Dollars Head for Weekly Decline as Stocks Fall  --Bloomberg
• Canada CPI higher than expected (Statistics Canada)

• Key Reports Due (WSJ): There are no economic indicators scheduled for today.

Quotable
“The quality of moral behaviour varies in inverse ratio to the number of human beings involved.”

Aldous Huxley

FX Trading – A New Dynamic?

Though we have little clue as to what will come out of the G-7 meeting, the banter we’ve seen suggest the currency focus will be on China.  The now booming trade surplus between China and Europe and the relatively high level of the euro currency has European leaders now squarely in the game teaming up with the US Senate.

Earlier this week, Chinese central bank head Zhou Xiaochuan tried to do some pre-empting by saying China will allow for market forces to play a bigger role in determining the value of the yuan.   He also said he was “sympathetic” to European concerns. 

We’ve heard this stuff many times before from China.  Maybe this time is no different.  But before there hasn’t been a good Chinese reason to let the currency move higher faster, now there is.  It’s inflation!

With food prices and energy prices soaring in China, a stronger currency will go a long way to reducing the imported cost of these items.  And reducing the cost of these items may go a long way to help stem some of the rising unrest among rural (poor) Chinese citizens.  The China boom has benefited across the spectrum.  But the “connected class” who live and work in the cities have been the winners.  Rural China, hundreds of millions, still struggle, some tremendously.   

“Rural China is still home to about 60% of the country's 1.3 billion people, but agriculture's contribution to GDP has fallen from more than a quarter in 1990 to less than 12% today. Central-government spending on agriculture and rural welfare as a proportion of total spending has similarly fallen from 8-11% in the 1990s to 7-8% for most of this decade. Thanks to a booming economy under Mr Hu and Mr Wen, the central budget is getting bigger and its expenditure is growing fast. But outlays on health care and education, as a proportion of total spending, remain lower than they were a decade ago,” according to The Economist magazine.

(There was a very good piece entitled, “China Beware “, that appeared in last week’s Economist magazine.  It didn’t get much play, but points out there are many problems and opportunities for severe unrest in China.)

So, we think there is an increasing probability that Zhou’s lip service, in front of the G-7 meeting, may be more than just lip service.  If so, we think the primary beneficiary will be the Japanese yen. 

And maybe that’s why we are seeing the yen move with the pack this week against the dollar.  That’s a new dynamic. 

John Ross Crooks III
Black Swan Capital

Wall Street Gets a Kick Out of Dollar Weakness

Key News
• Economic growth in China, India and Russia is helping to offset some of the lost output from industrialized countries suffering from a credit crisis, the IMF said. – WSJ

Key Reports Due (WSJ):
8:30a.m. Initial Jobless Claims For Oct 13 Wk. Expected: +7K. Previous: -12K.
10:00a.m. Sep Leading Economic Indicators. Expected: +0.3%. Previous: -0.6%.
10:00a.m. DJ-BTMU Business Barometer. Previous: +0.3%.
12:00p.m. Oct Philadelphia Fed Business Index. Expected: 8.0. Previous: 10.9.

Quotable
"Chance fights ever on the side of the prudent."

-Euripides

FX Trading – Wall Street Gets a Kick Out of Dollar Weakness

No matter how you slice it, the U.S. stock market is chugging along. The major averages are seeing more up days than down, and that’s translated into an awfully solid trend. Equity investors are feeling the flow and loving every minute of it.

And that’s exactly why they’re loving every second of the U.S. dollar’s collapse, too.

Investors in notable large caps are living large by buying into those companies making a killing in the United States’ newly found export market. Such companies are able to take advantage of the global economic boom, and the weakening dollar is an added kicker.

Of course foreign demand for U.S. goods is on the upswing as the cost of these goods fall in lock-step with the buck. And while many global economies helped themselves enter into a phase of solid growth, their spending power is boosted even further when they open their wallets to the U.S.

Many signs we’ve noticed recently point to a tight negative correlation between the stocks and the dollar, and subsequently foreign currencies.

Have a look …

Who’s doing the leading here? Is confidence in the stock market directly driving the dollar lower than the fundamentals reflect? Or does confidence in the stock market only mirror the lack of confidence in the greenback?

And what about globally – do investors outside the states look to stock market confidence as an indication the dollar will fall and the rest of the currency pack will be affected? Global investors have certainly justified extensive yen borrowing with this dynamic for the longest time. So you’d have to imagine other correlations exist.

John Ross Crooks III
Black Swan Capital

Dollar up on Crude and Gold Run? And a G-7 Multiple Choice

Key News
•Inflation in Europe accelerated in September as energy and food prices rose, with the annual rate exceeding the European Central Bank's 2 percent ceiling for the first time in more than a year. (Bloomberg)
•Bernanke said the housing downturn is likely to remain "a significant drag" on economic growth through early 2008 but income growth is propping up consumer spending. (WSJ)
•Poor corporate earnings and renewed worries about credit rattled investors on Tuesday, while record high oil prices threatened to add pressure to world growth. (Reuters)

Key Reports Due (WSJ):
7:45a.m. ICSC Chain Store Sales Index. Previous: unch.
8:55a.m. Redbook Retail Sales Index. Previous: +0.3%.
9:00a.m. August Treasury International Capital Flows. Previous: -$3.0B.
9:15a.m. Sep Industrial Production. Expected: +0.1%. Previous: +0.2%.
9:15a.m. Sep Capacity Utilization. Expected: 82.1%. Previous: 82.2%.
1:00p.m. Oct NAHB Housing Market Index. Previous: 20.
5:00p.m. ABC/Wash Post Consumer Conf. Previous: -13.

Quotable
“The myth that ‘science is objective’ may tend to be fostered in most cultures today in an attempt to preserve whatever status quo exists by giving it scientific blessing.”
                                                                                                                 - Robert Ornstein

FX Trading – Dollar up on crude and gold run?  And a G-7 Multiple Choice 

What is interesting is the fact the dollar has strung two decent days together in a row while gold and oil have been soaring. Crude said to be getting a boost on more Mid-East worries and growth; gold on all kinds of stuff; but what in the heck is the lowly buck doing following them higher?

Oil (black), Gold (red), US$ Index (blue) – 240-min chart:
 

A correction in the buck doesn’t change the longer term dynamics that seem to be setting up, unless of course we are wrong on the G-7 intervention thing! 

We’ve heard analysts refer to the current global market backdrop as fertile ground for another Plaza Accord-type agreement.  The Plaza Accord was an agreement between the industrialized nations to bring down the dollar through concerted central bank intervention. The difference between then and now, as you can see in the chart below, is the fact that the dollar was coming off an all-time high back then, in 1985.  And now it is at an all-time low. 

Explicitly, this was a policy to bring down the dollar.  But implicitly it was a policy to strengthen the Japanese yen. 

Now, it’s China that’s doing all the exporting and currency suppressing for export advantage.  So, the question: Will pushing down the dollar IF China doesn’t cooperate only makes this problem worse i.e. the global imbalance problem of exchange reserve accumulation and all the nasty scenarios that role in along with it?  Maybe not if the tradeoff is to make the US better; or at least keep Mr. US Consumer viable.

It does appear that a lower dollar provides some major benefits for the US economy, as we mentioned yesterday.  At the core we think is the stock market wealthy effect which gives the Fed cover. 

It’s multiple-choice time! 

A) China lets its currency run higher faster (yen follows higher on valuation) and finally some readjustment takes place (and it may not all be pretty); all announced before the G-7 meeting ends.
B) G-7 signals dollar depreciation regardless of any Chinese commitment to stop “manipulating” its currency and let it move up, placing a big pile of global imbalance (as the economist’s call it) on Europe’s back!
C) G-7 intervenes to push up the dollar and the yen, effectively pushing the yuan higher along the way; throwing Europe a bone that global growth is in trouble if the Euro recovery dies in its tracks.
D) None of the above

We will reveal the “right” answer next week once all tests have been collected. 

Jack Crooks
Black Swan Capital

The Rubin Rule! Not Yet, We Think.

Key News
 Asian currencies from the Indian rupee to the Chinese yuan are rising at a record pace as central banks turn to the foreign-exchange markets for help in fighting inflation. (Bloomberg)
 Europe became China's biggest export market this year, and Chinese exports to the European Union in the first nine months of this year expanded 30.8% from the same period last year, outpacing the 15.8% growth in exports to the U.S. And while China's currency has risen about 3.9% against the U.S. dollar this year, it has dropped 2.9% against the euro. (WSJ)
 New Zealand's inflation rate slowed more than the central bank predicted in the third quarter.
 The U.S. government regularly implores China to let its currency appreciate, but it seems to be India that is answering the call. Both emerging Asian nations have booming economies. Yet only India has allowed its currency, the rupee, to climb sharply against the dollar, underscoring India's willingness to adopt a market-guided approach to suppressing inflation and bolstering its new heft in the global economy. (WSJ)

Key Reports Due
(WSJ): 8:30a.m. Oct NY Fed Manufacturing Index. Expected: 13.25. Previous: 14.70.

Quotable ―"The collapse of the southwest real estate bubble in the United States didn't prevent investors from over-investing in Asia. The Asian crisis didn't prevent the Nasdaq bubble from developing. [I was] surprised by how rapidly the crisis mentality vanished. People can forget the lessons of a painful experience very quickly, and that can lead to poor decisions." Robert Rubin (Sep 2004)

FX Trading – The Rubin Rule! Not yet, we think.

There was some jawboning of the dollar being undervalued at the G-7 meeting this weekend, but no action has been taken to try and change that, at least yet. Two reasons possibly why:

1) US policymakers could be finding the orderly decline in the dollar is just what the doctor ordered. If the dollar keeps falling and US multinational corporate earnings remain robust as a result, AND liquidity continues to juice US stocks and emerging market growth, it appears to be a decent outcome. Why? Because the booming US stock market has a very positive wealth effect. That takes a lot of sting out of the plummeting housing market. Enough to keep Mr. US Consumer shopping? Maybe!

2) The Rubin Rule not applicable yet. We’ve seen reports that Mr. Bernanke has been breaking bread with Mr. Rubin lately. If the Rubin Rule was a topic, and Mr. B was listening, then intervention isn’t likely just yet.

Some analysts are publically calling for a rebound in the dollar. Many good reasons may be cited. Many make sense. But, the fact that we still see dollar bulls in public means not everyone has capitulated to the trend. And major capitulation to a price-led trend no matter the underlying fundamental rationale is when the Rubin Rule kicks into gear.

Former Treasury Secretary Rubin was a good currency trader—he knows markets and understands the role of sentiment and sentiment extremes. He knew central banks couldn’t fight the trend. But he knew that once a trend was extended and everyone was in the trade, and there were decent background rationales, it was a good time to intervene i.e. it increased the probability of a successful intervention.

We likely need to see more ― Death of the Dollar magazine covers. And more extreme positioning i.e. more ― acting bears instead of ― talking bears.

Jack Crooks
Black Swan Capital

Competing Themes

Key News
• Bank of England Governor Mervyn King suggested he's reluctant to cut interest rates to shield lenders from increased credit costs and predicted more ``turmoil'' in financial markets. ``The current turmoil in financial markets is not over,'' King said in a speech in Northern Ireland late yesterday. The benchmark interest rate ``will not be set now to insulate the banking system from the re-pricing of risk. But you can be sure that we will do whatever is necessary to keep inflation close to the 2 percent target.''  (Bloomberg)

Quotable
“Buy high, sell higher. Sell low, buy lower. That’s the way the old saw about making money in the market should read. To do otherwise is to be guilty of picking tops and bottoms. Both are deadly ego games.” - Edward Allen Toppel

FX Trading – Competing Themes

1) Risk appetite – the driver now it seems
Decoupling
Emerging market liquidity
Commodities demand
Carry back in vogue

2) Risk Aversion – waiting in the tall grass
Liquidity evaporates
Financial bubbles pop
Global growth become suspect
Carry unwinds

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 east—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 they’re even undervalued relative to the lowly dollar.

But, because we and many others are already talking about intervention, it probably won’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 don’t imagine there will be any dollar bulls left to hope for the best.

Jack Crooks
Black Swan Capital

It Seems All Bad

Key News
• September payrolls are expected to grow by 100,000 after a 4,000 decrease in August, according to the median estimate of economists surveyed by Bloomberg News. (Bloomberg)

Key Reports Due (WSJ):
8:30a.m. Sep Nonfarm Payrolls. Expected: +110K. Previous: -4K.
8:30a.m. Sep Unemployment Rate. Expected: 4.7%. Previous: 4.6%.
9:40a.m. ECRI Inflation Gauge. Previous: 116.8.
3:00p.m. August Consumer Credit. Previous: +$7.5B.

Quotable
“There is a universality in financial markets that spans the many trading systems over a long period of time…Markets are ultimately reflective of the most base human emotions of fear and greed, and the secular changes in individual markets are manifestations of the behavioral shifts between these two powerful forces.” - F.J. Chu

FX Trading – It Seems All Bad

Does support that becomes resistance then become support again?  I’m talking about the infamous 7819-level on the US dollar index that held since 1992, up until recently anyway.  The buck has now bounced back above the magic 7819 number.  Is it meaningless?  Is it expected consolidation before another surge lower? Or is it meaningful?  And from a meaningful side, I guess the question would be: Is all the bad news already priced into the buck? 

Bad News That We Know:

1. Fed “will” cut interest rates by another 50 basis points by March ‘08

2. The US “will” be dragged either into or very close to the edge of recession because the housing market “will” get worse

3. Mr. US Consumer “is” on his last legs; the consumer spending ballgame is about over

4. Europe “can” live with EURUSD at 1.45-1.50

5. Gulf States “will” abandon the dollar peg and dump dollars

6. More countries other than Iran “will” begin selling oil in euro instead of dollars

7. The globe “has” decoupled from the US economy

8. Current account deficits “do” matter (just don’t tell Australia and the UK)

Bad News We Suspect:

1. China will let its currency float much faster, and dump dollar holdings along the way (they’re probably not too happy with surge in US bond prices boosting their portfolio since mid June)

2. The Fed “will” be forced to stall rate cuts in fear of a dollar disaster (which means bad news number one above may be in jeopardy)

3. The dollar’s world reserve status is in jeopardy (only problem here is to identify who fills the void; the euro may be the candidate, but we still suspect deep down many believe the European Monetary System will face a real test in the not too distant future)

4. US assets will become increasingly unattractive (forget that US multinational earnings are soaring and real estate is getting cheaper by the day)

I am sure you can think of more bad news about the US dollar.  Just spend a couple of hours watching CNBC or Bloomberg TV if you can’t. 

Now, for all the eternal dollar optimists out there, the next list is the list of good news (readily available via our financial news product purveyors) that is priced into the dollar:

Hmmm………………………………………………… (Sorry Charley!)

None of the above is to suggest for one moment that the news can’t get worse for our dwindling greenback.  We have learned many times over that anything can and will happen in actively traded asset markets.  We know the consensus can be right for much longer than we think they “should” be.  But today’s comments are to suggest that maybe even a ray of good news for the buck may have an unusually large impact if such bad news is already “in the price.”

Non-farm payrolls at 8:30 a.m. EDT!  Get ready to rumble!

And after rumbling today, have a great weekend. 

Jack Crooks
Black Swan Capital