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Tue, Mar 31 2009, 14:56 GMT

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• Black Swan Currency Currents 31 March 2009

Key News
• World Bank to create $50 billion trade fund (Reuters)
• G20 leaders get stark warning on scale of crisis (Reuters)

Quotable
“The media tends to report rumors, speculations, and projections as facts... How does the media do this? By quoting some "expert"... you can always find some expert who will say something hopelessly hopeless about anything..”

           Peter McWilliams

FX Trading – SDRs Gaining Steam in the Press

Thomas Griffith was quoted as saying, “The news is staged, anticipated, reported, analyzed until all interest is wrung from it and abandoned for some new novelty.”

We can thank China and now Russia for staging news regarding a proposed SDR global reserve currency. Of course the media is on it leading into the G20. Perhaps not as fanatically as one might have expected considering the subject matter, but they’re on it.

We’ll ultimately wait till after the G20 for any real developments. If China and Russia find a way to get the nations (specifically the US) focused on world reserve currency discussion, then the intensity of reporting on this matter could easily ratchet up.

As we stand now, the SDR proposals from China and echoed by Russia are causing only ripples. The US will be the country that determines if we get any waves.

I copied the following pieces from the IMF website:

“The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system ...

“However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

“A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. This allocation would double cumulative SDR allocations to SDR 42.8 billion. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one fifth of the current IMF membership—have never received an SDR allocation.”

Makes us wonder: haven’t we already determined these SDRs aren’t really necessary?

Also, Mr. Zhou’s proposal would look to expand on the special on-time allocations, and then some. Perhaps not the intent, but a hopeful outcome of such an action would be a level playing field. But is that what will actually happen? Will allocating less worthy countries reserve assets solve any problems? Or will it only create new ways to reproduce the same problems that have us so frenzied right now?

There looks to be little, if any, credible threat to the US dollar’s status as world reserve currency. Even if talk on SDRs does gain momentum at or after the G20, there’s still little chance of dethroning the dollar without more detailed proposals with legitimate

World Bank President Robert Zoellick said recently, "to create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency."

That is the goal here – healthy financial markets. Does a new world reserve currency make such a goal achievable? Maybe. But does the current system prevent us from reaching that goal? Not likely.

So far, we are back on the risk appetite train this morning, after riding the aversion line south yesterday….Aussie, among the majors, is leading the charge with stocks and oil bidding higher…as you can see in the daily chart below, 7067 is the a key resistance level in a wide sideways range that began all the way back in October.  A break of 7267 could be powerful-watching!

   (see Aussie daily chart next page)
 

Regards,

John Ross Crooks, III
Black Swan Capital LLC

Published on  Tue, Mar 31 2009, 14:58 GMT

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