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Currency Currents

Mon, Oct 13 2008, 15:55 GMT

Black Swan Capital

Key News
• Commodities Rout May Be Half Over as Economy, Oil, Metals Demand Declines (Bloomberg)
• A Crash Heard Around the World (WSJ)

Quotable
“Every ambitious would-be empire, clarions it abroad that she is conquering the world to bring it peace, security and freedom, and it is sacrificing her sons only for the most noble and humanitarian purposes. That is a lie; and it is an ancient lie, yet generations still rise and believe it.”

         Henry David Thoreau

FX Trading – New Global Intervention and Our Technical Analysis Might Signal a Rest

Last week there was a huge cooperative among the world’s central banks to cut interest rates.  Central Banks in the US, UK, Sweden, Eurozone, Switzerland, China, South Korea, Taiwan and Hong Kong all got involved.

It wasn’t been long before the market mostly ignored this heavy-handed effort. And apparently the Federal Reserve didn’t have much confidence that global rate cuts would shore up investor sentiment either.

And that’s why the Federal Reserve spurred on a new initiative among the European Central Bank, the Bank of England and the Swiss National Bank that basically offers unlimited dollar-funding. The hope is to bring down money market rates and finally warm up the frozen lending system.

Also tossed out into the swirling winds of the financial system, Europe agreed to guarantee bank debt, the UK is committing money to three major financial institutions in exchange for influence in their corporate structure and decision-making, and Germany is dishing out $681 billion to back loans and support banks.

If you rate the success of these bundled efforts on stock market performance, then so far the central banks and governments involved have been successful.

But let me remind you that timing is everything. While these latest efforts might have a bit more staying power to begin with, we wonder if stocks, currencies and most other asset prices you can name are in need of corrective moves anyway.

Dow Industrials Monthly

A long-term look at the Dow Industrials puts its recent plunge right at support in the middle of its lows (red rectangle) following the recession that began in 2001. That point also corresponds with a 50% retracement (blue line) of the move since the low point of the 1987 recession.

And currently, the US dollar seems a bit overextended. Now, we don’t want to ignore the potential for serious capitulation among dollar-bears that keeps the rally alive. But if stocks really find a chance to bounce, then the risk-aversion flow that’s weakened stocks and strengthened the dollar could quickly reverse course.

Additionally, this could mean sharp inflows to currencies like the Australian dollar. Using the term oversold to describe the Aussie is a bit of an understatement. Wouldn’t you agree?

Regards,

John Ross Crooks, III
Black Swan Capital LLC

• Black Swan Capital Currency Currents 13 October 2008

Published on  Mon, Oct 13 2008, 15:57 GMT