BKT Special Report 09.19-25.08 What Will RTC Rescue Do For The Dollar?

September 20, 2008

bkpicsmall

————–Top 5 Stories in FX This Week—————-

4 Prophets on the Credit Crunch
The Gang of Three
Reckless? You’re in Luck
Just a Roll of the Dice?
Never Sell America Short

—————–Trading Thoughts-A Gambling Account—————
Admit it. Despite the volatility or rather because of it last week was a great time to trade. Not a great time to make money - unless you had the reflexes of jungle cat - but definitely a fun time be in the currency market. 20 rounds per day? 30? By Friday I was doing 40 and did even realize it. Of course when the dust settled I was up only modestly because wide spreads, sudden spikes and massive turns in sentiment created as many stop outs as winners. Never mind, it was rush to play and I enjoyed every moment of it because I never truly put myself at risk.

————–FX Market Outlook————–

In the dawn hours of Wednesday morning as I was riding the elevator to the CNBC studio I glanced blankly at the flashing buttons desperately trying to remember who went bankrupt that Monday. Ah of course, it was Lehman. But that was before AIG and after Freddie and Fannie and a million other market crises in between. The event had happened less than 48 hours ago, but already it seemed like a distant memory. Little did I know however, that turmoil that had preceded would pale comparison with what was just about to follow.

On Thursday, Hank Paulson announced that the US government would create am investment vehicle to take illiquid MBS assets off the books of ailing banks and the just for good measure the SEC banned short selling of 800 financial stocks. Net result? Global stock markets exploded on Friday with Footsie up 8% in one day and while Dow gained 750 points in just two sessions as the mother of all short squeezes pushed price higher. Winning is easy when the game is rigged.

Of course the authorities had no choice. In the inimitable words of Senate Majority Leader Harry Reid, “No one knows what to do.” So they had to do something. As I noted on Friday, “”They are absolutely petrified of a run on financial assets and they came very close to that on Thursday. At this point they have just decided that fiscal responsibility goes out the door and anything and everything that needs to be shored up financially will be done so in order to alleviate the panic.”

So what does this rescue do to the dollar? Friday may have provided a clue to the near term direction. Initially, the greenback rallied on the news, but as the day wore on the euro gained more and more strength until by end of trade Friday it ended on the highs near the 1.4500 figure. Granted the run in oil was a big boost to euro’ s fortunes, but the true catalyst was gold. Despite all of the hoopla regarding the new RTC, gold barely gave ground after gaining more than $100 in less than 48 hours.

The fact that gold remains bid is a sign that investors are losing confidence in the buck. The array of measures announced this week committed the US to nearly $1 Trillion in new government spending - a perfect formula for debasing the currency. Are we becoming the United States of Argentina? Perhaps. Gold may be the key to true market sentiment.

A move towards $1000 will almost certainly push the euro higher, not because the unit is particularly attractive in its own right, but because it is the primary anti-dollar bet in the currency market. If international investors lose their appetite for dollar denominated assets, the greenback will be in trouble irrespective of economic fundamentals elsewhere.

So watch the yellow metal next week. It may forecast dollar’ s fate better than event on the economic calendar.

————–Top 5 Stories in FX This Week—————-

4 Prophets on the Credit Crunch
The Gang of Three
Reckless? You’re in Luck
Just a Roll of the Dice?
Never Sell America Short

Like many FX traders I have more than one account. Almost everyone who trades FX seriously, be they retail or institutional has several dealing relationships. In a deregulated, decentralized, dispersed market that’s a smart thing to do. You never want to rely on only one point of exit in order to control your risk. But as retail traders we are fortunate not only to have many choices, but to trade smaller relative size. Since everyone in the currency market offers mini lots, its easy to open a small account and experiment to your hearts content. In fact I believe its not only easy, but also quite advantageous for retail traders to create a “gambling” account where you can go to town with your speculative capital.

What is the single biggest sin in trading aside from not using stops? No doubt its over trading. Yet telling an FX trader not to over trade is akin to telling a guy not to stare at a woman in a skimpy dress. We know its impolite but few can resist the temptation. Discipline may be the key to success in trading but when it comes to human beings all of us are subject to our appetites. Eventually everyone loses control. Much better therefore to lose it in a controlled environment.

That’s why a gambling account is so vital to your trading health. The markets will always entice us to gamble. Better to do it with a small amount of money, rather than wreck your real account. Trading books are littered with examples of guys and gals who made small fortunes in the market only to give them all back in a wildl over trading binge that typically ended up in a margin call. If you are going to get blown out of the market, do it your gambling account.

Next week, I’ll tell you how you can turn vice into virtue by making the gambling account your own little trading lab.

Now on to this week video.