FX Weekly 02.15.08- Ben Busts The Buck

February 16, 2008

bkpicsmall FX Market Outlook
Dollar:Ben Busts The Buck
Euro:Euro Builds a Base
Yen:Risk Returns
Pound: Retail Sales Will Be Key
Commdollars:Aussie!

Top 5 Stories in FX This Week

More Easing to Come
Retail Sales Show Inflation, Not Growth
$43 Trillion Market YOu Never Heard Of
Ripping Off The Elderly
Even The Wealthy Get Suckered

—————–Trading Thoughts - The Not So Perfect Trade—————–
Hang around trading long enough and you learn to become pretty jaundiced when someone shares their “perfect setup” with you. Inevitably, the person will choose the one absolutely perfect example when conditions in the market played out exactly as they’d imagined producing an effortless, profitable move.

————–FX Market Outlook————–
So much for the greenback’s vaunted rally. On Thursday Ben Bernanke went in front of Congress as Larry Kudlow wrote , “with the air of a Talmudic scholar” did not mince his words regarding the state of the US economy by stating that additional write-downs were likely for banks and tighter credit will restrain growth further. His words were then followed by a shocking drop in Empire Manufacturing and the lowest read in U of M Consumer sentiment survey in 16 years. Hardly a banner week for dollar bulls.

The most interesting story from our perspective however was the miss in the TICS data on Friday. This is a long term theme, but one with potentially disastrous consequences for the dollar. What happens when foreigners refuse to lend us any more money? The whole argument in the FX market will then shift from economic to structural concerns. I’ll be on CNBC at 6:10 AM EST (11:10 GMT) Tuesday the 19th discussing this idea with my good friend Andy Busch of BMO. Those of you up at that ungodly hour please feel free to tune in. (I’ll Youtube it for those who want to watch it later)

Meanwhile of more immediate concern on next week’s calendar will be US CPI data which we expect to be hot. This will put the Fed between a rock and a hard place as they will have to struggle with combating inflation while trying to stimulate growth. Aside from that, the calendar looks very tame and we may continue to churn in this 1.4500-1.4800 zone for quite some time as markets try to figure out where to go.

Yen showed some surprising weakness last week as risk appetite returned. Buffet’s fake play for the monolines, positive growth in US retail sales and decent data from across the pond convinced investors that gloom and doom was overdone. Will the good feelings continue this week? Possibly. In a holiday shortened week with little important even risk on the calendar, equity markets may continue to float along. The key story to watch will be the ongoing saga in the credit markets. Will someone rescue the monoline business so that the Port Of Authority of NJ can stop paying Tony Soprano rates on the municipal bonds? Calm restored to the credit markets will be the biggest boost to the carry. Turmoil and disarray however and we could tumble once again. Trade accordingly.

Pound continues to carve out a double bottom at the 1.9400 level but upside action is stymied at every turn. This week the surprisingly strong employment data provided a good argument that UK is NOT a mini version of US, but traders remain skeptical. Next week, Retail Sales which we are bullish on, could tip the scales either way depending on how they print. Pound feels like it wants to run to 2.000, but its needs a reason to overcome the sea of doubters who pounce on it at every attempt to rally higher.

How about them Aussies? We’ve been bullish the land Down Under for the past month and this week the price action vindicated our view as fundamentals continued to show that Australia remains the hottest economy in G-10. The AUDCAD trade continues to perform well and it will be interesting to see, given the possibility of weak CAD data if the trend will continue. The one big risk to AUDUSD has nothing to do with the country’s fundamentals but rather with resumption of risk aversion. If equities swoon, the Aussie as one of the highest fliers over the past few weeks could get its wings clipped.

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

More Easing to Come
Retail Sales Show Inflation, Not Growth
$43 Trillion Market You Never Heard Of
Ripping Off The Elderly
Even the Wealthy Get Suckered

Real life unfortunately does not work like that, Much as well all want to be James Bond, most of the time we act much more like George Smiley. Bumbling, fumbling fools acting on imperfect information and hoping that we succeed in the end. Sometimes our analysis is dead on, the markets respond exactly as we expect and the feeling of euphoria is intoxicating. It’s like throwing a perfect touch down pass in football or kicking the ball into the upper crossbars of the goal in soccer. Those memories tend to stay imprinted in our minds years after the event precisely because they are so rare. Most of the time however we slog though our daily battles with the market, just as we do with all other areas of our life.

This week’s trading is remarkable not because it produced perfect results, but precisely because of the myriad obstacles that presented themselves. To see how dealt with them please watch this week’s screencast