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Currency Currents

Tue, Jan 6 2009, 13:52 GMT

Black Swan Capital

Key News
• Obama Is Said to Favor About $775 Billion for U.S. Economic Stimulus Plan (Bloomberg)
• Dollar Rally Fizzles in Emerging Markets as Fed Awakens Appetite for Risk (Bloomberg) ... [Editor’s note: Are you sure?]
• European Inflation Slows, Increasing Scope for ECB to Lower Interest Rates (Bloomberg)
• EPA 'Cow Tax' Could Charge $175 per Dairy Cow to Curb Greenhouse Gases (Business and Media Institute)

Key Reports Due (WSJ):
7:45 a.m. ICSC Chain Store Sales Index For Jan 3: Previous: -0.5%.
8:55 a.m. Redbook Retail Sales Index For Jan 3: Previous: -0.5%.
10:00 a.m. Dec Non-Manufacturing Index: Expected: 37. Previous: 37.3.
10:00 a.m. Nov Pending Home Sales: Expected: 0.4%. Previous: -0.7%.
10:00 a.m. Nov Factory Orders: Expected: -2.2%. Previous: -5.1%.
2:00 p.m. Dec FOMC Minutes
5:00 p.m. ABC/Wash Post Consumer Conf For Jan 3: Previous: -49.

Quotable
“If you can count your money, you don't have a billion dollars.”

         J. Paul Getty

FX Trading – Stocks AND Dollar to Rally in the First Half? Keep Hope Alive

So was it Obama yesterday? Was it his words that sent the US dollar chugging higher? Did stocks rally sharply on Friday in anticipation of Obama?

So it goes, Obama’s newest proposal to drag the US economy out of the ditch it’s in went above and beyond the plans he’d been expected to unroll. The larger-than- anticipated amount of “stimulus” taking the form of tax cuts seemed to have caught many off their guard.

Of course, he’s still got big plans for creating new jobs, etc. And this is said to be causing the US dollar and US stock markets to rally because, hey, recovery is now right around the corner ... right?

Careful.

I’m in agreement that recovery will be a boon to the US dollar’s performance this year. Now, I don’t think we’re at a point when recovery is so close we can taste it. But I do think the growth differential between the US and competing economies will eventually improve for the buck as the US becomes the first to lift its head and creep out of the muck.

Could this potential have started the dollar off on the right foot this week? Sure.

But what about stocks? I wonder if it’s not too soon to start thinking a recovery 6-12 months (or more) down the road is good enough to drive share prices higher. Sure, I’m a believer that markets tend to lead major economic turning points. But you’ve got to think it’ll still be a while before the earnings and employment picture even stabilizes.
There’s been a pretty serious negative correlation between the US dollar and stocks (risk-taking assets.) The US dollar can rally NOW because foreign exchange trading is a relative game -- the fundamentals of one currency versus the fundamentals of another.

With stocks though, there’s not really a lesser-of-two-evils ... the relative game idea doesn’t really apply when we’re talking about companies within a single economy. Of course some companies are better off than others during in this environment, but when the current is moving heavily in one direction it doesn’t make a whole lot of sense trying to fight it.

So are the risk-appetite and negative correlation trends to be thrown out the window? My best guess would be “No, not yet.” I believe the US dollar will test its November 2008 high in the next month or two. If stocks don’t roll over to test their November 2008 lows simultaneously or soon thereafter (or vice versa and I’m completely wrong), then it may very well be time to jettison risk-aversion theme and put all the chips on a US recovery.

Of course, by the end of this month Obama won’t just be a President-Elect anymore. Things could change quickly at that point – for better or for worse.

Regards,

John Ross Crooks, III
Black Swan Capital LLC

• Black Swan Currency Currents 6 January 2009

Published on  Tue, Jan 6 2009, 13:53 GMT