Currency Currents - December 24, 2009
Quotable
“God bless us every one!” said Tiny Tim, the last of all.”
Charles Dickens
FX Trading – Twelve Themes of Christmas (guesses, wishes, and concerns)
1) The dollar has bottomed on a multi-year basis after a major test in 2009.
2) Interest rates are going higher as this recovery “normalizes” in 2010; we see 5% on the 10-year T-note before the year is done.
3) US job growth will be surprisingly strong.
4) There will be a crisis within the Eurozone late in 2010 that will shake the foundation of the euro as a single currency.
5) Asian-block currencies will breakout against the developed world majors and move higher.
6) Extremely tight intermarket correlations will finally begin to breakdown and currencies will be increasingly judged on both fundamentals and yield differentials.
7) Stock market volatility will increase as government backstops disappear. Stocks will initially get hammered on the broader realization the real economy is improving i.e. money flow.
China will continue to rock through mid-year, but at some time during the second half of 2010 it will experience a major financial disruption that will rock markets around the globe.
9) Gold sees $700 before $1,500 (Sorry Dad!)
10) South Africa begins to unravel politically (it intensifies for international consumption) and the rand gets hammered.
11) Russia makes another major incursion west, increasing its “buffer zone;” continuing to pressure Baltic and Central European Currencies.
12) Thank you for reading Currency Currents and putting up with our rants, raves, mistakes, bad calls, and curmudgeon-ness (I don’t think it’s a word but fits well here). We hope we have shared some things good; we know we have received many things good from the amazing quality of people who read CC each day.
Merry Christmas and Happy New Year!
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Note: Currency Currents will publish again on January 4th.
Currency Currents - December 22, 2009
Key News
• U.K. Economy Shrank 0.2% in Third Quarter, Less Than Previously Estimated (Bloomberg)
• Brazil Has No Reason to Keep Increasing Currency Reserves, Freitas Says (Bloomberg)
Quotable
“Investment in fixed assets such as factories and the rail network accounted for more than 95 percent of China’s 7.7 percent growth in the first three quarters of 2009 and made up 45 percent of gross domestic product, which is higher than any major economy in history, according to Morgan Stanley Asia Chairman Stephen Roach.”
FX Trading – Europe Baking its Own Cake
Will the world economy be able to continue its recovery process as global monetary stimulus measures are phased out?
That’s a good question; and I doubt I can sufficiently answer it … except to say that it’s probably a lot easier said than done.
But as far as how currencies might be affected by the withdrawal from stimulus, here’s how Joachim Fels, Manoj Pradhan and Spyros Andreapoulos of Morgan Stanley seem to think the major central banks will fall in line with interest rate moves:
“We expect the beginning of the exit from super-expansionary monetary policies and its implications to be the dominant global macro theme in 2010. We will discuss details of the likely monetary exit strategies across countries in next week’s year-end Global Monetary Analyst. Here, it suffices to say that we expect the Fed, the ECB and the PBoC to move roughly in tandem and raise interest rates from 3Q10, with the Bank of England following in 4Q. Some, like the central banks of India, Korea and Canada, are likely to move earlier, while others, such as Japan, will lag behind.”
Yesterday we sent around a news piece to our paying members that talked about how maybe the excessive stimulus and bailout mentality is returning to the financial system the abnormal risk taking and irresponsible practices that sparked market failure, especially in Europe.
That makes us wonder whether the Morgan Stanley trio’s forecast for the ECB and Fed to move in tandem upon exit is a low probability bet. Based on hundreds of billions of euros in writedowns expected in 2010 and the fact that European banks dominate (as a percentage of assets) the global financial system, we seem to think the ECB may be a bit slower to its six-shooter than the Fed.
But when we make a statement like that – anything that attempts to play up the US as being in a less unfavorable position than one of its counterparts – we’re almost certainly reminded by our readers that the US owes a lot of money to China … and China is going to stop buying US treasuries … Zhou said such and such … or whatever.
Ok, fine – I concede. The US is no model of fiscal discipline. Not by a long shot. But much of that is baked into the cake. And that in and of itself is part of the reason that the items we expect will impact Europe are not already baked into the cake.
Assuming we’re not cutting off our nose to spite our face, then the ECB will lag … and so will the euro as we push through 2010.
EURUSD (black) vs. 10-yr T-Note Futures (red) Weekly:
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - December 21, 2009
Key News
• The European Central Bank won’t bail out debt-stricken member states such as Greece, which must repair its public finances on its own, ECB governing council member Ewald Nowotny said. (WSJ)
• The rand declined to a six-week low on speculation the interest-rate appeal of holding South African assets may diminish as the dollar appreciates. (Bloomberg)
• Hungary’s central bank will probably cut its benchmark interest rate today to the lowest level since the fall of communism to speed the country’s recovery from its worst recession in 18 years. (Bloomberg)
Quotable
“A tale of two worlds. We forecast 4% global GDP growth in 2010, but this masks two very different stories. One is a still fairly tepid recovery for the advanced economies. The other is a much more positive outlook for emerging markets, where we forecast output to grow by 6.5% in 2010. In short, we think that the themes of global rebalancing and EM growth outperformance have staying power and have even been bolstered by the crisis.”
Morgan Stanley Global Economic Forum
FX Trading – The yen will take back carry trade crown in 2010!
Any dollar bull story must consist of the Mr. Greenback relinquishing its role as carry trade currency i.e. primary major currency borrowed to fund risky asset and other high yielding investments. The Japanese yen, the all-time carry trade champ, looks like it is about to be anointed once again.
This recent note from the Financial Times Lex column summed it up well [our emphasis]:
“When you run out of things to say, shout. On that rubric, the Bank of Japan [BOJ] is yelling. In spite of holding the record for the consecutive number of years of deflation (seven), the BoJ has said it will no longer ‘tolerate’ falling prices. This is a sop to the government, which wants the central bank to help the economy. Judging by BoJ’s inflation forecasts, negative 1.5 per cent this year, minus 1 per cent next year and a 0.7 per cent drop in 2011, Japan has to tolerate deflation a while longer.
“The alternative is aggressive quantitative easing, a successful Japanese export little practised at home of late. Buying government bonds would help fund the budget deficit. With other central banks talking about exiting QE, however, it would also undercut the yen, which on Friday fell almost a cent. Shout? Somebody heard.”
Among the major currency pairs, we think being long USDJPY in 2010 will be the best single payoff. Key central banks are poised to drain the punch bowl in 2010. But the Bank of Japan will likely be the glaring exception to this rule. Thus, Japanese yen yields remain at enticing carry levels while US rates should be ticking higher across the curve.
USDJPY Weekly:
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Note from David Newman….
Our trading recommendations in our Forex & Currency Futures, Emerging Market Currencies, and Currency Investor services have been racking up some very nice gains lately, as our Members were well positioned for a dollar rally.
If you’ve missed this initial move in the buck don’t worry. We think this is just the beginning of a major trend change which should offer plenty of opportunities to make good money, on both sides of the market. We’d love for you to give our recommendations a try.
Please contact me by email or telephone and I’d be happy to discuss which of our services best fits your needs.
Thank you.
All the best,
David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672
Currency Currents - December 18, 2009
Key News
• Emerging-market equity fund inflows slowed in the week to Dec. 16, with 2010 poised to be a more “testing year” amid waning stimulus measures worldwide, according to EPFR Global. (Bloomberg)
Emerging Stock Index Daily:
Quotable
“Each thing is of like form from everlasting and comes round again in its cycle.”
Marcus Aurelius
FX Trading – Rising relative yield differential is good for the dollar
Last Friday I penned Growth and inflation? Key to our 10 reasons the dollar has bottomed. I hope you believe me now. One of the key points to the dollar move was “Carry trade idea history.” History we think because the Fed may surprise on the interest rate front; we expect US interest rates on the front end of the curve to exceed anything Japan has to offer soon. In that case, the Japanese yen once again inherits the carry trade mantle. It is one reason why we are bearish on the yen going forward and why our Members are positioned for such a move.
But we also expect relative US growth will exceed its competitors in Europe (and Japan). Relative growth is always a vital prop for any currency and it should be no different when it comes to the dollar in this cycle.
Our case for growth and inflation is a relative calculation. However, the argument, “The Case for Higher Real Yields,” from Richard Berner & David Greenlaw, two excellent economists from Morgan Stanley, provides more than enough meat for our relative US growth and rising rate expectation story. A few excerpts below [our emphasis]:
“We think 10-year Treasury yields will jump to 5.5% by the end of 2010, driven primarily by a rise in real rates to 3% or more. That call is clearly inconsistent with the consensus view of modest growth and declining inflation, and it is light years away from the current level of real TIPS yields at 1.3%. Even those who agree with our somewhat upbeat view of sustainable growth and moderate inflation think that our rate call just does not jibe.
“…Ex ante, investment is poised to increase more than saving; higher rates required to clear market. At first blush, the increased saving that we expect may sound bullish for interest rates. What many fail to appreciate, however, is the extent to which investment outlays will rise over the course of the next year in spite of the rise in rates. Housing, of course, is credit-sensitive, but credit availability and collateral requirements are as important as interest rates. The fact that traditionally measured housing affordability has skyrocketed and yet housing is staging only a modest recovery from a record plunge speaks to the importance of credit availability. Our hunch is that improved availability in the coming year means that housing demand will improve even as rates rise.
“For Corporate America, there is a parallel story. Capital spending plunged in the recession to an unprecedented degree, and new investment is needed to rebuild capital stocks. The ‘accelerator’ of rising output on a sustained basis and improved corporate cash flow will also drive capex higher. Moreover, empirical work suggests that corporate capital spending is relatively insensitive to changes in interest rates. Finally, we believe that companies will shift from a record 10 quarters of liquidation to accumulating inventories by year-end. Combined, this shift to sustainable growth in housing, business investment and inventories will result in a significant increase in private credit demand.
“The upshot is that the necessary balance between rising saving and rising net investment is unlikely to occur at today’s interest rates. Finally, two other factors are expected to lift real interest rates. First is a repricing of the likely path for short-term interest rates. Currently, fed funds and eurodollar futures are pricing in a 90bp move up in rates by year-end 2010, and a cumulative move by year-end 2011 of about 200bp - less than what we expect through year-end 2010. As a result, we think the market has more repricing of the yield curve to do. Second, uncertainty over fiscal credibility and inflation will lift term premiums and likely add to the looming pressure on real yields.”
If we compare the yield curve of the US to the Eurozone, you can see that yield advantage in Europe is only on the front end of the curve. Already US yields for beyond 5-yr benchmarks are ahead of the Eurozone.
US (black) vs. Eurozone (red) Yield Curve (spread difference green at bottom):
Our bet is the problems in the Greece and increasing expectations of a deceleration in German growth means the US sooner than later shows a yield advantage across all terms of the yield curve. And if Mr. Berner and Greenlaw are correct about a 5.5% 10-year yield by the end of 2010, the yield advantage favoring the US could be big!
10-yr US Benchmark Yield (black) and US$ index (purple) Weekly: The last time we saw a 5.5% yield was back in May 2001; incidentally the US $ index (purple line left axis) was near 120).
Have a great weekend.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Note from David Newman….
Our trading recommendations in our Forex & Currency Futures, Emerging Market Currencies, and Currency Investor services have been racking up some very nice gains lately, as our Members were well positioned for a dollar rally.
If you’ve missed this initial move in the buck don’t worry. We think this is just the beginning of a major trend change which should offer plenty of opportunities to make good money, on both sides of the market. We’d love for you to give our recommendations a try.
Please contact me by email or telephone and I’d be happy to discuss which of our services best fits your needs.
Thank you.
All the best,
David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672
Currency Currents - December 17, 2009
Key News
• U.K. November Retail Sales Unexpectedly Fall 0.3% in First Drop Since May (Bloomberg)
• Greenspan Says S&P 500 Rally Cuts Stimulus Needs as Household Wealth Rises (Bloomberg)
• Oil and inflation (Financial Times)
• “Greece – A Line in the Sand?” (Naked Capitalism) Editor’s note: another’s quick perspective to complement what we’ve been saying regarding the risks building up behind the Greece debt fiasco.
• Time magazine names Bernanke “Person of the Year” (Reuters) Editor’s note: Very few “persons” received as much attention this year as Benny B, though I’m surprised Michael Jackson wasn’t in the running. I suppose we can feel good that Ben was able to edge out House Speaker Nancy Pelosi.
Quotable
Rise, brothers, rise; the wakening skies pray to the morning light,
The wind lies asleep in the arms of the dawn like a child that has cried all night.
Come, let us gather our nets from the shore and set our catamarans free,
To capture the leaping wealth of the tide, for we are the kings of the sea!No longer delay, let us hasten away in the track of the sea gull’s call,
The sea is our mother, the cloud is our brother, the waves are our comrades all.
What though we toss at the fall of the sun where the hand of the sea-god drives?
He who holds the storm by the hair, will hide in his breast our lives.Sweet is the shade of the cocoanut glade, and the scent of the mango grove,
And sweet are the sands at the full o’ the moon with the sound of the voices we love;
But sweeter, O brothers, the kiss of the spray and the dance of the wild foam’s glee;
Row, brothers, row to the edge of the verge, where the low sky mates with the sea.Sarojini Naidu, The Coromandel Fishers
FX Trading – Good On the Dollar
Well, this is something we haven’t exactly seen in a while. The US dollar is making good on positive fundamental developments; granted it’s being helped along a bit by ongoing worries in Greece.
In case you missed it, another credit rating downgrade of Greece has pressured its bonds, the spread between 10-year Greece and German government bonds has widen to 269 basis points. We haven’t seen anything that wide since April … and the record during the euro’s existence sits a tad bit north of 300 basis points.
But back to the buck … I was a bit surprised yesterday when the buck reacted well to the FOMC rhetoric. I figured the Fed would do as it normally does and try its hardest not to say anything that would spook equity markets. Though I expected traders who’d bid up the dollar on the sooner-than-later interest rate expectations would come away disappointed. Instead they keyed on the slight change in wording which revealed an optimistic tone on the recovery potential for the US … and they didn’t go running from the buck.
So instead of wiping away some of its recent gains, the dollar stood strong and hasn’t looked back … as all the majors save the Japanese yen are down more than 1% so far today. This rates a look at the weekly chart of the US dollar so we can get a better understanding of the magnitude of this move:
Last week is when this index broke above its downtrend; this week its confirming that move. While it’s overcome nearer-term resistance this week, there is an area of price congestion – several points of previous support and resistance – just above 78 that could slow this move down somewhat. Something to keep an eye on anyway.
Perhaps more important though, can investors really believe in the US dollar? As with so many countries, especially in Europe, the US needs to get its fiscal house in order. The US consumer likely needs to make some sort of comeback, perhaps not a return to pre-crisis mentality but at least stabilizing at a level that spurs economic activity in the US. And that’s likely not going to happen until jobs take a decisive turn upward. The latest NFP was a good step, but its only one step. And not to mention, we’d have to see the consensus get over the stigma around the Fed keeping rates abnormally low for so long and the potential for that to create inflation and wreck the dollar.
But for now traders and investors might actually want to believe (and that will help), though it’s going to take a lot more for sentiment to shift for the long-term.
And as long as traders and investors are losing confidence in the Eurozone’s ability to keep it together, it will buy some time for the US to keep rebuilding. A long-term dollar bottom is something that will likely gain some credibility as the year winds to a close.
But for those who are not ready just yet to throw in the towel and go long the dollar, you can take solace in the fact that maybe this move is just a much needed correction. Maybe it’s just a reprieve after several calls by global central banks that rising currencies are putting their respective recovery at risk. Maybe this is just a year-end book-squaring thing that’s driving asset markets, especially the dollar.
But maybe not – US stocks are holding up at the same time that the dollar is making its strides. That’s not typical of risk appetite capital flows. A look at a chart of the Shanghai SE Composite index and the S&P 500 index might confirm this is a US-centric story:
China shares rolling over?
Last time a change in correlation between crude oil and the US dollar foreshadowed a massive dollar rally. Should we take note of this change of correlation between US stocks and the dollar?
Why not, right?
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Interview with a “Maniac” commodities trader this month…
Our special “trader” interview section of Currency Investor this month features our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We think you’ll appreciate Kevin’s insights; we certainly did.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - December 16, 2009
Key News
• Global Confidence Holds Near Record as Economic Recovery Gains Momentum (Bloomberg)
• Dollar Investors Turn Bullish for First Time Since March as Economy Grows (Bloomberg)
• Dovish RBA hits Australian dollar (Financial Times)
Quotable
“People such as George Soros and Michael Moore certainly talk a good game, but the next Mother Teresa they are not. Mother Teresa never criticized the free-market system; wealth just wasn’t for her. Soros and Moore are quite the opposite. They will never take a vow of poverty and dedicate themselves to helping the poor. They just want our civilization to take a vow of poverty and become poor.
This has caused many to wonder: How can someone preach socialism while being the most rapacious “capitalist” imaginable?”
Selwyn Duke, The Pathology of the Rich Socialist
FX Trading – Monetary Policy and Emerging European Currencies
So we’ve been harping on the rising concerns in Europe and what they may ultimately mean for the euro. But it’s clear that the worries are not confined to the EMU. Yesterday traders put a hurting on the Hungarian forint, the Polish zloty and the Czech koruna.
US Dollar vs. Hungarian Forint
Yesterday’s move amounted to more than a 2% move in this pair, though so far this morning the forint is recovering some lost ground.
For Hungary in particular, there’s been a steady stream of bad news for their economy and recovery prospects. Adding to the weak fundamentals for the forint is the current stance by the country’s central bank. They are expected to cut rates yet again when they conclude a policy meeting this Friday. And there’s quite a mix between what neighboring central banks are doing; and it’s even quite different from the latest expectations of the Federal Reserve.
The Czech National Bank just today cut rates to a record low of 1%.
Sweden’s Riksbank just announced they will stay on hold; rates will go unchanged for the foreseeable future.
Poland’s central bank is expected not to budge on interest rates either when they meet next week.
Norges Banks, however, is behaving differently. Today they hiked rates by 25 basis points. And this wasn’t the first in a while; they raised rates at their last meeting. Overall, this helps to make the Norwegian krone an attractive investment among handful of Emerging European currencies that are lagging far behind in the fundamental category.
But as stable a footing that Norway seems to have, the krone is not immune to risk-aversion capital flow. It too got hit pretty hard yesterday; just not nearly as hard as the forint. Which brings me to the US dollar and the Federal Reserve …
The Federal Open Market Committee announces its latest intentions with interest rates when they conclude their meeting this afternoon. There’s always a decent amount of attention given to this decision, even if nothing much is expected from it. That’s how the last several meetings have gone when there’s been no reason to expect a departure from the “rates will remain low for an extended period of time” line.
But, this time is a bit different.
There have been three reasons so far to give traders some incentive to pay close attention to the FOMC announcement today:
1) Positive surprise from November US Nonfarm Payrolls
2) Positive surprise from a preliminary retail sales report
3) An eye-catching uptick in inflation via the Producer and Consumer Price Indices
What will this all amount to? Not much.
The Fed is definitely not ready to raise interest rates; and they’re probably not even ready to talk about raising interest rates. There’s simply too much work left to be done saving the economy, as they see it.
If there is any change to their rhetoric it is probably to appease those looking for the Fed to acknowledge they’re paying attention to new data. But ultimately they’ll say plenty of risks still remain and they won’t risk choking off the economic recovery by lifting rates too soon.
This announcement is all about rhetoric, as they almost always are. Because frankly a move higher, towards say 1%, probably won’t choke off recovery. But if it’s perceived that way then it may not matter.
The Fed is still doing a lot of handholding; and one of those hands belongs to the market.
I’d be cautious about expecting anything hawkish from the Fed that might bolster the US dollar today. But it will be interesting to see, in the days ahead, if the economy continues to show signs of improvement, whether the US dollar will maintain its recent strength.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Interview with a “Maniac” commodities trader this month…
Our special “trader” interview section of Currency Investor this month features our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We think you’ll appreciate Kevin’s insights; we certainly did.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - December 15, 2009
Key News
• Banks have ‘responsibility’ to spur recovery (Financial Times) Editor’s Comment: Well of course they do, seeing that the taxpayer apparently had the ‘responsibility’ to bail them out. [Sarcasm Alert] Can’t we all just do what the government tells us? Things would be so much better off that way.
• Traders wary ahead of Fed rate decision The Fed announces its decision on monetary policy on Wednesday. While no change in the main rate is expected, investors are wary that Ben Bernanke, Fed chairman, could alter the accompanying statement in a manner designed to prepare the market for an end to the current ultra-loose policy. (Financial Times) Editor’s note: much better than expected Nonfarm payrolls and US retail sales reports are keeping traders on their heels. But it’s still early and the Fed will likely not put much focus on weaving in rate-hike rhetoric this time around. Perhaps a ‘sell the rumor, buy the news’ opportunity?
Quotable
“Even if the Fed’s forecast is accurate this time around — and that’s a big if — the road to neutral is dotted with potholes. For starters the Fed has a $2 trillion balance sheet that will have to be unwound without drawing too much attention to asset sales lest it incur politicians’ wrath.
“The liquidation of the $1.25 trillion of agency mortgage- backed securities the Fed is acquiring will raise yields on both the MBS and the underlying mortgages. Members of Congress never let anything stand in the way of a home purchase, including the ability to service the debt.”
FX Trading – Centered on Eurozone
I am looking around this morning and there are all kinds of economic tidbits and news stories that, in isolation, could prove meaningful. But one item is particularly catching my attention … and everyone else’s, it seems.
The euro is down more than 100 PIPs as I write and it’s helping lead the way sharply higher for the US Dollar Index. The chart below seems to reveal a pretty convincing break of the daily downtrend reaching back to March. While the element of uncertainty in the markets has shaped up nicely for the buck, there is a bit of technical resistance just ahead that could slow down this move a bit:
But even if the bullish dollar takes a breath, could sentiment make a permanent shift in favor of the US dollar?
That’s a tough question to answer, and one in which the majority of respondents would firmly say ‘No!’ So we’ll leave that simmering for now and look a little bit more short-term.
Yes, we’ve seen two numbers in the US — November Nonfarm payrolls and preliminary retail sales – surprise many traders and dare those to ask: is the US recovery getting its feet planted?
There I would also say it’s too early to tell; though my gut has me leaning towards ‘no’ … or at least not yet. The fairy-tale version of economic growth that I relate to “recovery” is a long ways off.
There is still bickering going on about banks not lending money, about the potential for interest rates to raise and throw another hip-check on the bruised and beaten US homeowner. And when the Christmas season has come and gone, we may be unpleasantly surprised with the US consumer’s actual appetite for stuff.
And turning to Europe, things obviously aren’t much better. While it’s no small task, at least the US only has to drag one country out of recession; the Eurozone isn’t as fortunate.
We’ve talked about the threat Greece poses to the European Monetary Union; Ireland, Portugal and Spain are all experiencing their own difficulties. Recently there’s also been news concerning Austria’s banks – they just nationalized Hypo and they’ve put another major bank on a watch list. And in the meantime, Germany, in far better shape than the rest of the Eurozone members, is still finding rough patches and is experiencing some headwinds on its path toward recovery. It’s quite a handful for the European Central Bank who’s tasked with determining an appropriate one-size-fits-all interest rate.
Needless to say this dynamic has become a major obstacle for the euro; traders seem to be realizing that its meteoric rise since March is not exactly justifiable.
Just a friendly reminder …
Plus, we are spotlighting the euro in our monthly Currency Investor newsletter that is due out today. You can get more information on it below …
Thanks.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Interview with a “Maniac” commodities trader this month…
Our special “trader” interview section of Currency Investor this month will come from our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We are looking forward to hearing Kevin’s insights.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - December 14, 2009
Key News
• Small Business Confidence Plunges — Where Will Jobs Come From? (Inner Workings blog, Asia Times)
• Goldman Trades Shouldn’t Get U.S. Aid, Volcker Says (Bloomberg)
• U.K. House Price Pickup Will Stall in 2010 on Forced Sales, Rightmove Says (Bloomberg)
• Abu Dhabi steps in to bail out Dubai (Financial Times)
• Fewer short positions bode well for dollar (Financial Times)
•
Quotable
“It’s tough to make predictions, especially about the future.”
Yogi Berra
FX Trading – Keeping a Lid on Volcker Means Keeping a Lid on Risks
In one of several brilliant campaign moves, Barack Obama enlisted the service of several big names to lead his economic decision-making. Why? Well, probably because he realized that he had no relevant experience of his own from which to lead. It reassured many voters that he was willing to dole out responsibilities to the pros, to surround him with competent people.
Sort of.
As chairman of the President’s Economic Recovery Advisory Board (ERAB), Volcker has been less than visible in the President’s economic endeavors. It’s hard to hide his massive 6’7” frame. But apparently it’s easy to keep his ideas under wraps.
The few times he does get a word in, or is asked for a quick interview here and there, Volcker tends to have good, or at least better, ideas than what’s emerged from the current administration.
And not to mention his analysis seems far deeper and more reasoned than what’s passing through the lips of his counterparts.
A couple excerpts from a recent Der Spiegel interview:
What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don’t come overnight, they don’t come in a quarter, they don’t come in a year. You can begin them but that is a process that takes time. If we don’t make that adjustment and if we again pump up consumption, we will just walk into another crisis.
Yes, seems to be generally recognized by the economic consensus, but perhaps the conclusion drawn by Volcker is going too much ignored.
Here’s another:
What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.
Oooh, buddy … that’s a little bit too candid for the American public. Does your leash need to be shortened?
It’s amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It’s hard to deny that we need some forward looking financial reform.
If you want people to think your humanitarian cause is worthwhile, just go out and get yourself a celebrity spokesperson; people love celebrities, they want to do just as celebrities do.
If you want people to think your economic cause is worthwhile, stick Paul Volcker on stage next to your podium and talk about economic recovery efforts; people will believe you’re serious, they’ll think you know what you’re talking about.
So here we sit, battling the “recovery is here” feeling that threatens the recovery that may or may not already be here. In the wake of Dubai, Greece, Spain and other smaller developments, the markets seemed as though they were paying more attention to the risks that remain.
But the surprise November US Nonfarm Payrolls report said, more or less: the recovery is here!
The result: a bit of a shake-up to recent risk-appetite correlations. We’ve given you in recent days some potentials reasons why the US dollar might have put in a major bottom.
And while the S&P 500 is moving quickly back towards its highs, the euro … not so much.
Will stocks pay catch-up to a falling euro on a decrease in risk appetite … perhaps because, as Volcker feels, we are not out of the woods and still face many challenges?
Or will the euro play catch-up to stocks on renewed risk appetite … perhaps due to the recent optimism around jobs and Obama’s “real” top economic advisor’s (Larry Summers) recent comments?
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Interview with a “Maniac” commodities trader this month…
Our special “trader” interview section of Currency Investor this month will come from our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We are looking forward to hearing Kevin’s insights.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - December 11, 2009
Key News
• Chinese industrial output surged in November to its fastest pace since June 2007: output rose 19.2 percent from a year earlier, beating economists’ expectations of an 18.0 percent rise. (Reuters)
• India’s factory output rose 10.3 percent in October. (AP)
• The top sovereign credit ratings of Britain and the United States are not under threat of a downgrade right now, but a worst case scenario foresees a cut by 2013, analysts from Moody’s Investors Service said on Friday. (Reuters)
Quotable – In the world maybe be flat, but your Socialist brain is concave category….
From New York Times columnist Thomas Friedman (a partial excerpt from the entry), complaining Sept. 9 about the difficulty of passing health-care and cap-and-trade bills, yearning for “one-party autocracy” — which “certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one-party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st Century.”
[Editor Note: It worked so well in Russia and China that they only ended killing about 100 million, conservatively, of their own people. And this tripe passes for the thinking of the “enlightened elite”? Truly sad indeed, and yet another example of why the ends justify the means for socialists of all stripes. Scary!]
FX Trading – Growth and inflation? Key to our 10 reasons the dollar has bottomed
Today’s US price data a bit hotter than expected this morning. China boom numbers out last night. And guess what, the dollar likes what it sees. Is a growth surprise in the air? It would change the dynamics for the dollar and is a key part of any story that suggests the dollar has bottomed. Did I say bottomed? Well, yes I did, thanks for asking….
Here are our 10-reasons why the buck has bottomed…try to read these with a straight face. If you can’t, then maybe we are on to something.
1. Credit Crunch Sea Change
US Savings going up; debt sentiment changed
2. Risk Bid Trigger Again…initially
Greece and Dubai
3. Growth – Not as bad as expected; it’s all relative
Non-farm payroll and Mr. US Consumer
4. Carry trade idea history
Fed hikes before BOJ and before ECB
5. US Assets are very cheap
Foreign Direct Investment Flow (currency cycles play that role)
6. Sentiment – Newsletter writers are in apoplectic territory
Everyone hates it and one-way bet
7. Correlation – it has changed
No new low with gold blow off and stock high
8. Technical
Broke its weekly down trend & extremely oversold
9. Euro craters as a currency
Rush to dollar-the world reserve currency punctuated
10. Bill Gross isn’t always right; neither is Jim Rogers*
*Note: Late yesterday, David Newman told me to flip on CNBC—Jim Rogers was pontificating. So, I tuned in to listen to another slamming of the buck, more profusion of love for China. Well, I got the China love, but surprise, surprise, surprise, Jim said the dollar can actually go up for a while. Shocked? Indeed. So, maybe Jim is right all the time.
Have a great weekend.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Interview with a “Maniac” commodities trader this month…
Our special “trader” interview section of Currency Investor this month will come from our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We are looking forward to hearing Kevin’s insights.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - December 10, 2009
Key News
• A Savings Binge for Consumers (WSJ)
• Spain’s Woes Echo Europe’s Uneven Rebound (WSJ)
Quotable
“No matter how disastrously some policy has turned out, anyone who criticizes it can expect to hear: “But what would you replace it with?” When you put out a fire, what do you replace it with?”
Thomas Sowell
FX Trading – Excuse me Mr. Brown, Mr. Sarkozy – say what?
In The Wall Street Journal yesterday, Mr. Brown and Mr. Sarkozy, of Britain and France respectively, penned a piece for WSJ readers. Let’s start with this …
Europe led the way last year in facing down the global financial crisis, restructuring our banking system and strengthening the global financial system. The European Union was also at the forefront in calling for a new forum for economic cooperation of G-20 leaders. And from the outset of the crisis, it was Europe that promoted the fiscal stimulus—and sought to coordinate it globally—that has been a major factor in preventing recession becoming a world-wide depression.
Oh thank you Europe, without your guiding light who knows where we’d be … perhaps protesting in the streets demanding permanent jobs.
Spain, like Greece, is plagued by economic woes. On Wednesday, Athens protesters demanded permanent jobs.
Courtesy the Wall Street Journal
Sorry, I couldn’t resist. Now back to Mr. Brown and Mr. Sarkozy …
I take it they’re trying to be proactive, planting the seed that they did in fact play an integral part of stabilizing the financial system. I mean, they seem to say they got the ball rolling on banking restructuring, G-20 cooperation on recovery efforts, and global stimulus measures.
Ahhh, wait just a second. Did you guys say “it was Europe that promoted the fiscal stimulus—and sought to coordinate it globally—that has been a major factor in preventing recession becoming a world-wide depression?”
Yeah, that’s what I thought you said.
Now consider this excerpt from a working paper released by the Bank of International Settlements back in October:
Taken together, these estimates suggest that European banks’ US dollar investments in nonbanks were subject to considerable funding risk at the onset of the crisis. The net US dollar book, aggregated across the major European banking systems, is portrayed in Figure 5 (bottom left panel), with the non-bank component tracked by the green line. By this measure, the major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).
And then this one:
The frequency of rollovers required to support European banks’ US dollar investments in non-banks became difficult to maintain as suppliers of funds withdrew from the market. Banks were thus forced to come up with US dollars, given their reliance on wholesale funding and short-term FX swaps. Essentially, the effective holding period of assets lengthened just as the maturity of funding shortened. This endogenous rise in maturity mismatch, difficult to hedge ex ante, generated the US dollar shortage.
And this one:
The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions.
Now what was I saying? Oh yeah …
So it was Europe’s idea to go beg on the doorstep of the Federal Reserve solicit global stimulus measures that would shore up international (read: European) banks’ balance sheets. Otherwise the Federal Reserve would have never have coordinated an effort to bailout the world from the recent financial crisis.
Bravo, Mr. Brown! Bravo, Mr. Sarkozy! You are both beacons in an increasingly foggy global economy.
So tell us, gentlemen, where to now?
We also have agreed on a more efficient system for supervision of the financial sector within Europe to better monitor systemic risks, to ensure that EU regulation is applied consistently, to settle disagreement between national supervisors, and to deal with crisis situations. Banks must now hold sufficient capital, ensure liquidity, and reward only genuine value creation and not short-term risk-taking.
Right. Since you’re sticking the taxpayer with the bill when your banks become nationally (or internationally) subsidized, you’re going to adopt strict regulation so that these greedy banks won’t make the same mistake twice.
And “… to deal with crisis situations?” That would imply you’re ready for the crisis, which sort of means it then not a crisis at all, right? Control the language, control the people.
Anything else?
This crisis has made us recognize that we are now in an economy which is no longer national but global, so financial standards must also be global. We must ensure that through proper regulation, the financial sector operates on a level playing field globally.
Hmmm, they must have had lunch with Nancy Pelosi recently. Dare I ask: anything else?
Among these proposals, we agree that a one-off tax in relation to bonuses should be considered a priority, due to the fact that bonuses for 2009 have arisen partly because of government support for the banking system.
EEtthckckkk! Echkth! Sorry. Please, go on …
However, it is clear the action that must be taken must be at a global level. No one territory can be expected to or be able to act on its own. And if we can find a solution, implemented consistently across the major economies, then we may find a way to ensure that taxpayers do not pay in a systemic crisis for the risks taken on by the banking sector. We might also be able to help the funding of our Millennium Development Goals and address climate change.
Ahhh, geez. Why’d I ask? Where do I start?
Because implementing a consistent set of financial policies across Eurozone countries is working so well, let’s not stop there. [Forgive me for turning to the concept of tight-coupling put forth in Richard Bookstaber’s book, A Demon of Our Own Design. More specifically, I worry that more government involvement and regulation to keep tabs on an already complex system only exacerbates to potential for unintended consequences to surface.]
And because it’s an innate duty of the tax payer to bailout any bank that’s on the verge of going belly-up from taking on an exorbitant amount of risk, let’s be sure to eliminate banking flexibility.
And because some of the immense disgust for politicians is being deflected towards greedy bankers these days, let’s take this opportunity to see that we also eliminate executive incentives.
And thank goodness we got the token climate change comments in there for good measure.
So what are you waiting for? Let’s rally behind Europe to institute regulatory reforms, tax bank exec bonuses, restructure banks, create global financial stability forever and save the planet.
Oh, and Barack, Ben and Timothy – we’re going to need your help too; but let’s keep that on the down-low. Alright? Thanks
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Long-term trends, major global economic issues, interviews with top traders, book reviews…
We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …