Currency Currents

Key News

• The Fed's efforts have diminished worries about a big financial failure, but wariness about lending remains in bond and loan markets. Paulson said the Fed should exert greater scrutiny over securities firms. (WSJ)
• The Bank of England signaled that it could soon make another cut in interest rates and -- moving to reassure U.K. banks -- said it was studying new ways to provide relief to strained credit markets. (WSJ)

Key Reports Due (WSJ):

• 8:30a.m. Initial Jobless Claims. Expected: -8K. Previous: +22K.
• 8:30a.m. 4Q Final GDP. Previous: +0.6%.
• 8:30a.m. 4Q Corporate Profits. Previous: Unch.
• 10:00a.m. Feb Help-Wanted Index. Previous: 21.
• 10:00a.m. DJ-BTMU Business Barometer. Previous: -0.1%.
• 11:00a.m. Mar Kansas City Fed Mfg Index. Previous: -5.

Quotable

"The bamboo that bends is stronger than the oak that resists."

Japanese Proverb

FX Trading - Dollar Selling Bias

As George Soros writes in his book The Alchemy of Finance, "I contend that financial markets are always wrong in the sense that they operate with a prevailing bias, but the bias can actually validate itself by influencing not only market prices but also so-called fundamentals that market prices are supposed to reflect."

In short, the dollar may be playing an unusually large role in its impact on the fundamentals at this point in the cycle. And maybe that's a bit more justification for the central banks to intervene. But they dare not violate the Rubin Rule (as much as we think Rubin is a political opportunist, and not exactly one of our favs, he did establish a successful rule for intervening). As Treasury Secretary, Teflon Bob was keen on waiting for some type of near-term trend to develop before committing funds to an intervention. If the buck can get out of its own way for a bit, and establish more than a three- or four-day trend, just maybe we see some action form CBs. That is a pure SWAG on our part!

The buck is back on the ropes after a sharp two-day slide. Lackluster housing and durable goods data yesterday didn't help stocks or the dollar. We now include stocks, Dow Transports, as dollar coincident, because that's what we've seen of late. What is interesting, well maybe not that interesting to others, but to us, we noticed the Transports shoos-ting its little head above near-term resistance. Will the Dow Industrials tag along?

US$ Index - Is this a test of the low? Was the recent move a head fake? Lay down your money! Getting close to make or break time.

There is no change to either the daily or weekly trend i.e. the path of least resistance is still clearly down... But...we still cling to the thinning reed that recent Fed actions, despite all the free-market damaging criticism aside, which is where are loyalties lie, just might do the trick.

The pound doing its thing

Yesterday, the British pound showed similar weakness. It wasn't a huge surprise since we're aware that the U.K. economy is facing some rough patches and less-than-fluid credit markets.

But the big dip yesterday likely came in reaction to central bank-speak. Bank of England governor Mervyn King let the doves out of the bag.

The BOE head hauncho expressed the need for extra liquidity to assist banks in greasing up local credit markets. He also made clear the need for temporary adjustments to lending facilities. Sound familiar? It should. Adjustments to lending facilities are one part of the Fed's multi-pronged, makeshift approach to reforming the financial system.

By far, traders reacted mostly to King's comments that BOE rate cuts may not be far off.

But what is surprising is that the British pound rallied all the way back from a sharp sell-off to finish the day higher.

Surprising price action in these markets of late is becoming a 24-hour affair!

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

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