Blacl Swan Capital, Currency Currents 12.11.10

Friday 12 November 2010 www.blackswantrading.
com
FX Trading – Covering the bases.
It seems like mostly old news is being recycled and swirling around the markets. Thus,
it’s like the markets are just floating wherever the wind takes them, responding to the
ongoing debate around potential QE2 effectiveness (or even its necessity), inflation and
interest rate moves in China, peripheral debt concerns in the Eurozone, and G20.
To be sure we’re keeping you in the loop on the latest developments, here you go:
QE2
Nearly every financial and economic news story makes mention of QE2. Thus, it clearly is
still having an impact on the markets ... though the overall impact has likely shifted a bit.
The reason for the shift is partly attributable to the positive unemployment numbers
out of the US a week ago. Now investors are trying to balance a somewhat better
outlook for the US economy with the need for QE2. That’s resulting in speculation that
much of the QE2 will not be needed; and that’s adding to the story that QE2 isn’t even a
good idea to begin with.
But investors are not forgetting the agreed upon effect of quantitative easing; that is,
asset bubbles. The work of the Fed may or may not impact the real economy, but there
is little question that it will buoy stock prices and drive commodities and natural
resources higher in value. What should be a concern, though, is whether driving asset
prices higher at this point is prudent. Or in other words: does QE risk driving asset prices
beyond fair value, thereby pressuring an already fragile economy and making asset
prices vulnerable to serious collapse?
Look at the CRB commodity index today, down about 2% and making a move to test
trendline support:
Daily Q/.CRB 01/06/2010 - 22/11/2010 (NYC)
Price
BarOHLC, Q/.CRB, Last Trade USD
12/11/2010, 310.71, 311.23, 307.67, 308.04
310
305
300
295
290
285
280
275
270
265
260
255
250
.12
01 07 14 21 28 06 12 19 26 02 09 16 23 30 07 13 20 27 04 11 18 25 01 08 15 22
June 2010 July 2010 August 2010 September 2010 October 2010 November 2010
Jeremy Grantham was on CNBC yesterday and he gave a very comprehensive interview
on his market views. He is concerned. You can watch the interview here:
http://www.cnbc.com/id/40115265
While he’s not as much concerned about scolding the Federal Reserve for taking
initiatives that drive up asset prices, he is concerned about the Federal Reserve not
stepping in to keep assets from moving into bubble territory. Here’s a chart we came
across today regarding the near-record level of crude oil speculation which can’t really
be supported by global economic strength:
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
But perhaps coffee is a better example, seeing that there seems to be absolutely no
threat of a supply shortfall or a sudden surge in demand. Yet the price of coffee is
moving up with the commodity complex on the QE2 impact; the difference is, though,
that coffee is well above weekly highs and has touched a new 13-year high – Coffee
futures in red; CRB Index in black:
Weekly Q/.CRB, Q/KCc1 19/08/2007 - 23/01/2011 (NYC)
Price Price
USc BarOHLC, Q/.CRB, Last Trade USD
Lbs 14/11/2010, 313.7, 320.38, 307.67, 307.76
Line, Q/KCc1, Last Trade(Last) 450
190 14/11/2010, 202.8
185 420
180
175
390
170
165
160
360
155
150 330
145
140
300
135
130
270
125
120
115 240
110
105 210
.12 .12
S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J
Q3 07 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
Grantham also believes that, perhaps after some addition strength in stocks over the
short- to intermediate-term, the S&P 500 could eventually crater to fair value at 900 (or
even lower based on the market overshooting.)
China
We talked on Wednesday about how China has been making moves to address the
common concerns of its global counterparts – i.e. stem speculative excesses within its
economy which, if left unchecked, could result in tragic misallocations of capital and
price pressures. It seems expectations are growing that China could execute a
substantial interest rate hike to help stem inflation. The report of inflation at 4.4%
yesterday aided these expectations.
And the combination rocked Chinese stocks earlier today, knocking back the Shanghai
Composite by 5%. Below is a weekly chart of the Shanghai Composite (black) and the
S&P 500 (green). It looks as though the Chinese stocks could pull back to the 40-week
moving average, at least. And would such a move lead US stocks lower as well? US
stocks are looking like their 5-week winning streak will come to an end this week.
Weekly Q/.SSEC, Q/.SPX 02/11/2008 - 19/12/2010 (SHA)
Price Price
USD BarOHLC, Q/.SSEC, Last Trade CNY
14/11/2010, 3,140.39551, 3,186.71973, 2,976.5293, 2,985.43481
1,160 SMA, Q/.SSEC, Last Trade(Last), 40
14/11/2010, 2,780.8007
Line, Q/.SPX, Last Trade(Last)
3,200
1,120
14/11/2010, 1,208.34
1,080 3,000
1,040
2,800
1,000
960 2,600
920
2,400
880
840 2,200
800
2,000
760
720 1,800
.12 .12345
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
How much staying power do these Chinese rate hike expectations have? Let’s turn to a
very succinct idea from Michael Pettis, again taking us back to the ubiquitous QE2:
There is a way for countries to protect themselves against QE2, but it would
require that they give up intervening in their currency. In other words the only
reason QE2 will create excessive monetary expansion in China is because the
PBoC will insist on purchasing all dollar inflows at the exchange rate set by the
PBoC and monetizing them.
Thus we have China worried about the inflationary effects of QE2 but they are denying
the role that their currency manipulation, through FX sterilization, is playing in the grand
process. We just now wait to see how China wants to play this going forward as the
details come into better focus.
Eurozone
We all know the story: sovereign debt of periphery countries is posing all kinds of
problems when we consider austerity measures, growth expectations and the financial
stability of the Eurozone banking system.
The euro started the day off heading south again. Here are some not too unfamiliar
charts that on the Irish struggles:
But the euro has rebounded with
the rest of the currency complex as
the US session gets going. The
reason for the rebound: early
concerns over the budget situation
in Ireland have been softened after
the EU has said that current
bondholders of sovereign credit will
not be penalized ... blah blah blah
...the EU will offer funds to Ireland ...
blah blah blah.
This entire Eurozone situation has

ebbed and flowed on a seemingly
hourly basis since stealing most of
the limelight from QE2 at the end of last week. Not surprisingly, the currencies are
ebbing and flowing as well, limiting traders to success mostly in shorter-term
opportunities.
G20
“Kick the can down the road” is being used to describe the most recent G20 meeting
that culminated this week. We would argue that description would make a good,
timeless mission statement for the group.
The Group of 20 has been successful at meeting the lowest of expectations. But while
they pretty much have gotten nothing done, their gatherings have at least increased the
global discussion of interest rates, currencies and global imbalances. While much of that
talk is the same old fluff every time (e.g. Nicolas Sarkozy speaking of long, hard reforms
that will guarantee global stability), there seems to be some progress made in how the
analyst consensus understands the global dynamics.
One commentator even saw a silver lining in this meeting, one that he said
inconspicuously applies pressure on China to take action where it can and should.
Barack Obama even contributed to the discussion with a typical but pointed comment
on the need for market-led currency prices (cough, cough; China).
Have a nice weekend.
John Ross Crooks III

Black Swan Capital LLC
www.blackswantrading.com
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Blacl Swan Capital, Currency Currents 12.11.10

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Friday 12 November 2010 www.blackswantrading.

FX Trading – Covering the bases.

This entire Eurozone situation has

Have a nice weekend.

John Ross Crooks III

Attention conservative ETF investors ...

“Currencies will be the main driver of

Currency Investor (CI) specializes in analyzing the global-macro currency markets (6

Thanks for your thoughtfulness in sending a copy of your latest issue.

But… How? When? What?

You could say that Currency Investor is the

Do you want to miss the trend? Or carefully capitalize on it?

I am a subscriber to your monthly newsletter… Your daily "quotes" are excellent.

Sign up now for only $49 per year.

Yours for maximum profits,

Unlike many publishers, we welcome your calls and emails.

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