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very fact that crowds possess in common ordinary
qualities explains why they can never accomplish
acts demanding a high degree of intelligence. The
decisions affecting matters of general interest
come to by an assembly of men of distinction, but
specialists in different walks of life, are not
sensibly superior to the decisions that would be
adopted by a gathering of imbeciles. The truth is,
they can only bring to bear in common on the work
in hand those mediocre qualities which are the
birthright of every average individual. In crowds
it is stupidity and not mother-wit that is
- Gustave Le Bon
Seoul, a senior South Korean official said the
latest fluctuations in the dollar and won were
excessive ... it shows how irrational the
sentiment is, he said, The Wall Street Journal
There are two possible
reasons for the dollar move Tuesday:
2) Something changed in
the macro environment.
As I was watching
the market’s very odd price action Tuesday, I
had no plausible answer to these two nagging
1) If there is some concerted
effort by global central banks to dump dollars,
why haven’t US Treasury bond prices plummeted?
2) And, if the price action is based on a
change in the global macro fundamentals ie
inflation and liquidity, why are the commodity
currencies, Australian and Canadian dollar lagging
the rest of the pack on the move?
can the currency market be manipulated - it's by
far the largest market in the world
- you ask? Well, Mr Choi Joong-Kyung
gave you the answer: irrational sentiment!
The variables that impact daily upon the
currency markets are vast and diverse - it is
extremely difficult to get a handle on so-called
"cause and effect" from day to day. And even when
you do know the fundamentals, the price action
relative to said fundamentals often appears
perverse. It's precisely this dynamic that leads
many players to trade in extremely short-term time
frames; thus reacting to every scrap of news
thrown onto the market by any two-bit media pundit
and their cadre of industry "sources" who also, by
the way, have positions in the market. Objective
journalism it is not.
These "scraps of
news" are then perpetuated and given weight by a
crowd of so-called traders who chat with each
other all day long - each proving their point
because they have a Holy Grail technical analysis
package on their desk top to pinpoint, you guessed
it, cause and effect. And gee, "the story came
from a 'reputable' news organization, so it has to
be true'. And look, prices are surging, it must be
true”. And on and on it goes.
This is a
crowd that is ripe for manipulation!
because the currency markets are so damn
leveraged, when the news-bit driven groupies act,
the rest of us either have to play along or get
out the way.
That is my summary of why
manipulation could have been responsible for
Tusday’s news. I thank one of my most astute
readers, Dave, for forcing me to focus on scenario
number one. Here is an excerpt from an email he
sent to me Wednesday morning:
time, I'm scanning the charts and see the USD/ZAR
moving real quick ... strange I say to myself,
this pair doesn't make such moves so early in the
trading day. Well, right in time, lo and behold,
Reuters releases a story right before the Japanese
open on Tuesday in Asia.
Focus of the
story: Bank of Korea [BoK] to adjust their
foreign reserves. Since they have the 4/5th
highest amount of USD reserves, something to take
note of as obviously everybody did. Also mentioned
in the story is a survey of reserve bankers
stating they plan to make adjustments and the
story even digs up a banker in Bahrain chatting
about how the EUR is gaining. The story has a real
sense of urgency to it. But, wait a minute, the
Bank of Korea mentioned this idea last December
... And, the really funny thing about this story
is that if the BoK was actually going to switch
out of dollars, then they had just lost over 2% of
the value of their current reserves and made any
other pairs they wanted to buy 2% more expensive.
Now, come on, they are definitely not that stupid.
As it now turns out, today we read that they never
intended to suggest they were dumping the dollar
but simply that they would be adding other
countries currencies but not at the expense of the
second scenario is that something changed in the macro environment Tuesday - or at least it was crystallized.
This is an excerpt of a note I sent to clients Tuesday night:
• It is oxymoronic to think of rising liquidity and an aggressive Fed. But that is what we are seeing. Notice that M2 continues to soar despite the fact the Fed began hiking rates back in June.
In effect, we have the "reflation" trade back in vogue if the liquidity dynamic is the driver. Asset bubbles rock on!
• Sell dollars
• Buy commodities (usually including metals and energy, but the move Tuesday included the grains, as wheat an soybeans surged)
• Buy bonds
• Buy stocks
interesting Tuesday was that US stocks were punished - they were former beneficiaries of the reflation trade. Maybe hedge funds and others believe European stocks are looking more promising ... boosted by abundant liquidity across the zone. Here is a chart of the German Dax Index vs the S&P 500 index prices in euros:
Seeing these two charts in isolation, where would you be putting your money? This, in effect, has the potential to provide background support for the euro.
It is an odd dynamic indeed:
• Fed tightening short
• Excess market liquidity, especially in
• Rising inflationary expectations
• Possible coordinated moves away from the dollar
odd combination could lead to a vicious circle for the dollar that we need to consider:
a) Fund managers
prefer euro stocks to US equities on valuation and
the currency dynamic. Besides the macro dynamic of
the potential for a portfolio gains boosted by a
rising euro, there is an underlying fundamental at
work. Germany - the key driver of European growth
is in better shape than many believe, according to
the Economist magazine
this week: "A study by Deutsche Bank suggests that Germany's productivity growth has been just as fast as America's since 1995 if both are measured on the same basis. Wages in Germany, however, have grown more slowly, so unit labor costs have fallen. Partly thanks to such pruning, Germany's real trade-weighted exchange rate with the rest of the world (based on relative labor costs) has risen by only 4% since early 2002 despite the surge in the euro against the dollar.
"German business is supposedly too flabby to compete in world markets. Yet over the past five years German exports have grown more than three times faster than America's, pushing Germany ahead of America as the world's biggest exporter."
b) Euro bonds, despite a lower equivalent yield than comparable US Treasuries, maybe expected to outperform. Euro inflation appears tame relative to the US, and the European Central Bank isn't expected to move on rates at least until some time in the Q3 of this year, at the earliest.
c) A liquid global economy provides support to China, which in turn sustains real demand for commodities. As more liquidity flows back into China, further pumping up their respective financial bubble, it moves away from the buck.
d) To the degree US inflation rates rise faster than Europe, it reduces the benefit of the rising yield differential for the dollar ie the real rate differential (nominal interest rates minus inflation) is what counts.
There are many loose ends when
trying to define a change in the macro
environment. The interrelationships are often
tenuous at best. It’s one of the reasons I am
leaning toward scenario number one - manipulation.
It's easier to define and a lot more interesting.
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com