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Currency Currents

Thu, Dec 4 2008, 13:47 GMT

Black Swan Capital

Key News
• Sweden Cuts Benchmark Rate More Than Forecast as Economy, Inflation Slow (Bloomberg)
• New Zealand Cuts Key Rate to 5% From 6.5% as Recession Curbs Export Demand (Bloomberg)
• US, China headed for possible currency clash (Breitbart)

Quotable
“Wait until it stops rolling and pick it up.”

         Bob Eucker, on how to catch a knuckleball

FX Trading – Interest Rate Decisions Dominate Headlines -- But Is It News?

Well, the trend is certainly there. Central banks are cutting interest rates in a big way. The first two key news headlines above speak to that point. And of course, the Bank of England just announced a 100-basis point rate cut this morning. The European Central Bank cut 75 basis points.

Heading into these two key decisions traders bid down both the pound and the euro. Selling pressure forced the British pound below key daily support but the price popped back up ahead of the announcement.

Reaction after the BOE announced was somewhat pound-positive. The decision was in-line with expectations and it seemed traders were in no hurry to push the British pound lower. But the bounce remained contained as traders waited to see and hear from the ECB.

Well, they’ve seen what the ECB did. Even though the 75-basis point cut was a larger cut than was expected, prices didn’t respond a whole lot. Now we wait to hear a press conference from the main man, Jean-Claude Trichet. The big question for him will likely be: are additional rate cuts necessary? We would say yes.

Looking at the technical picture, the British pound has tested key daily support. While it’s holding back above this level night now, it seems like further declines are not far off on the horizon.

The euro has been disappointingly boring over the last couple weeks. Traders have had little conviction over the need for the euro to backtrack from its declines ... or continue its descent.

On a technical basis, the euro is stuck in a narrowing trading range, refusing to break in either direction. Unfortunately, the immediate reaction to the ECB news hasn’t given us any peak at which way the euro might be itching to run.

What we can take from this chart is the important fact that, with narrowing ranges such as this, prices typically exit the range heading in the same direction they entered. In the case of the euro, the direction is down.

Plus, we are also keeping in mind some of the fundamental drivers that will impact the intermediate-term trends for these currencies. Jack touched on one important point on Tuesday in Currency Currents:

Banks in the United Kingdom and the Euro Zone are loaded up past their eyeballs in liabilities. As a percentage of GDP, they’re exceptionally more exposed than, say, US banks. And let’s not forget the exposure each of these European regions has in the form of loans to emerging markets. Major deleveraging is yanking money out of emerging market economies fast. Major defaults have become a huge risk. This over-exposure to emerging market economies is another major burden on European and UK banks that the US doesn’t have.

Keep that in mind as we make our way to week’s end. Perhaps Trichet will have a lot to say next hour. And perhaps traders would prefer waiting until tomorrow when the November US jobs report is released.

Regards,

John Ross Crooks, III
Black Swan Capital LLC

• Black Swan Currency Currents 4 December 2008

Published on  Thu, Dec 4 2008, 13:54 GMT