FX Trading – Oh risk aversion, you spite me!
Just when it looks safe to dip a toe or more in the risk aversion pool, snap goes the Great White from down under. Off almost 3 cents to the dollar yesterday, and a snap back rally up almost 2 cents this morning, the Aussie is feasting on currency players.
Risk aversion, at least from our perspective, appeared yesterday to “have some legs.” After all, didn’t we learn central banks lost round number one to the credit crunch? Shouldn’t that have humbled the risk appetite crowd just a bit? Has risk appetite become some kind of special cult bowing down to the omnipotent deity of global liquidity we call “central bankers”?
I guess I had a bad central bank experience as a child. For my faith in central banks is nowhere near the deity level—in fact…well, never mind.
What the heck ever happen to the old phrase, still used by an old smart guy, Jeremy Grantham, as “reversion to the mean?” That was the old-time religion. No need for tent revivals. We all had faith in that?
This from Mr. Grantham in his quarterly letter, GMO, from way back in October:
“Of course I’m fed up. We had Risk on the ropes. His followers were panicking. They were calling for the ref to stop the fight: ‘He has absolutely no idea how badly our boy is hurting … he has no idea!’ And what does the ref do? Ends the round early, extends the break, and allows a dangerous injection of adrenaline. Risk then leaps out of his corner, apparently rejuvenated, and wins the next couple of rounds. And here we are, wondering whether Risk has taken enough punishment to make him vulnerable to a knockout blow in a later round. Or has he completely recovered?”
But maybe we should just assume that all risk, from here on out, simply feeds into the dollar. After all, we continue to believe that as long as the US consumer holds up, the dollar may be okay, or at least, muddle through just a bit. Back to the idea of currency analysis being an ugly contest and it all being a relative game. But troubles are building for Mr. US Consumer and the decoupling theme i.e. the world running ahead while the US sputters, is gaining more momentum.
Will Mr. C finally shrug?
“Serious pressures are mounting on the US consumer on five fronts: Job growth is slowing, surging energy and food quotes are draining purchasing power, adjustable rate mortgages are resetting, lending standards are tightening, and housing wealth will likely decline. Do these dark clouds finally and ominously herald the perfect consumer storm?,” writes Morgan Stanley’s Co-Head of Global Economics, Richard Berner.
If Mr. C shrugs, the cyclical stuff whacking the buck get worse i.e. the interest rate differential continues to undermine the buck and the risk of US recession rises. They reinforce one another on the downside.
But, and as you know, there is always a butt, or at least another hand, when it comes to economic “science,” if round two goes to the credit crunch, again, the old-time religion may be new again.
Jack Crooks
Black Swan Capital
