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Currency Currents

Fri, Oct 3 2008, 12:54 GMT
by Jack Crooks

Black Swan Capital

Key News

• - Money-market rates jumped to records and the Bank of England relaxed borrowing rules for financial institutions as ``extraordinary'' strains deepened the credit freeze. (Bloomberg)

US Economic Events (WSJ):

8:30a.m. Sep Nonfarm Payrolls: Expected: -105K. Previous: -84K.

8:30a.m. Sep Unemployment Rate: Expected: 6.1%. Previous: 6.1%.

10:00a.m. Sep ISM Non-Manufacturing Composite Index: Previous: 50.6.

Quotable

“The problem is that Congress produces nothing. Whatever Congress wishes to give, it has to first take other people's money. Thus, at the root of the welfare state is the immorality of intimidation, threats and coercion backed up with the threat of violence by the agents of the U.S. Congress. In order for Congress to do what some Americans deem as good, it must first do evil. It must do that which if done privately would mean a jail sentence; namely, take the property of one American to give to another.”

  Walter Williams

FX Trading – Hodgepodge

Unemployment Rate and Dollar Cycles

In the chart below, we have overlaid the dollar bull and bear cycles on top of the unemployment rate. And given the last two cycles in the dollar i.e. bull from August 1991 to July 2001 and bear cycle from July 2001 to March 2008 (assuming it bottomed there; yes a big assumption we make I know), it doesn’t seem there is much correlation with the unemployment rate. But what this chart does seem to show (granted a small sample size) is that a bear or a bull market can begin in the face of rising unemployment. So, let’s say the unemployment rate is another one of those unreliable indicators on which to trade the dollar—at least longer term.

The Great Correlation Continues—on the downside

The impact of hundreds of billions in credit derivatives meant massive liquidity-driven tightly correlated market bubbles. The Great Unwind of the Great Correlation likely has a lot farther to go, just in case you think commodities or crude or stocks look cheap. And of course, you might remember there was yet another asset tightly correlated to this group i.e. the US dollar. It was negatively correlated. Which means, as these asset classes go down, the dollar is supposed to go up. And oddly to many, just that seems to be happening. Below weekly of Gold, Oil, and S&P 500….

Remember How Easy “They” Said it Would Be?

Many unsuspecting investors stretching for high-yield in a world of low yield deposits in the dollar were told how easy it is to get more yield—just jump all over those emerging/developing world currencies paying double-digit yields. Put that baby away in a CD and reap. One little problem, those pushing the stuff forgot to share this tidbit on most occasions: the risk to reward equation has not yet been nullified. Double digit yield in and of itself means there is risk.

But, in a world so enamored with the idea the US dollar can go only one way—down—and emerging markets can go only one way—up—the risk reward equation never entered into the minds of investors stretching for ever more yield.

As usual, with all easy plays in the world of investment, it is ending badly. One startling example is a darling of the bank deposit world—the Icelandic krona. This currency has been crushed against the dollar as money drains back to the center and away from the periphery. Those stuck in these deposits now understand what double-digit yield means. It means it can easily cut both ways and double-digit losses can materialize in a heartbeat. Yet another hit to the old buy and hold strategy.

US non-farm payroll today means is could be another wild one out there. Strap on those belts.

Have a great weekend.

Jack Crooks

Black Swan Capital LLC

• Download full Currency Currents with charts

Published on  Fri, Oct 3 2008, 13:13 GMT