NEWS / Foreign Exchange

Currency Currents

FX Trading ??“ Beware the Jaws of Subprime and time to get serious

Just when you thought it was safe to go back in the water, subprime rears its vicious jaws again; this time in Europe.

As reported in Bloomberg this morning, ???UBS AG, Europe's largest bank by assets, reported its first quarterly loss in almost five years after declines in the U.S. subprime mortgage market led to $4.4 billion in losses and writedowns on fixed-income securities.???

I??™m sure you remember the recent run on U.K. bank Northern Rock Plc. And last week we saw subprime bite into Merrill Lynch and Japan??™s Nomura Holdings. The week before that Bank of America, Wachovia and Capital One Financial all reported subprime-related gashes in their quarterly results.

(Editor??™s note: Makes one wonder if CEO??™s are lucky or good?  During the boom times, the CEO??™s at all the major houses were visionaries.  Remember how credit parceled out into smaller bundles was supposed to reduce risk?  Remember how stress-tested all these portfolios were supposed to be? Sure, most CEO??™s can impress with mission statements, customer centric marketing plans, technology integration, blah, blah, blah when the environment is good??¦but when the business cycle changes, there are only a few that seem to shine.)

In August, similar news of subprime losses would have sparked a major sell-off in risky assets. Now, only two months down the road and investors seem to have found ways to suppress these concerns. Risk appetite is back big time.  But, being old school, we noticed a little divergence of late i.e. a Dow Theory divergence.  The Transport Index has not confirmed the new high in the Industrials:

 [Chart not available in text format]

U.S. stock markets may open today??™s session a bit weaker, but currency action is mixed ahead of tomorrow??™s FOMC announcement??”euro and Aussie are edging lower.  Crude is down over a buck, will the Canadian dollar follow?  Does the Canadian dollar ever correct?

Markets are expecting at least a 25 basis point cut from the Fed. But it??™s uncertain if the Fed comes out swinging with its rhetoric tomorrow.

We anticipate the Fed will give in to the markets and cut their benchmark rates. After all, it??™d be a major disappointment that could carry serious consequences if they don??™t give the markets what they want. But the job of the Fed Heads isn??™t to appease financial markets, which is why we??™re also open to the possibility that Ben Bernanke and his buddies talk a tough game and seal off expectations for further rate cuts in the months to come.

Confidence in the so-called world reserve currency is dwindling by the day.  We??™re not supposed to worry because it??™s an orderly decline that will balance all those nasty global imbalances; we??™re told.  But managing a currency lower is about as easy as herding cats, or junior high school students.  It can??™t be done unless one is very, very lucky!  So, we think there is very little separating a ???managed??? orderly decline and the possibility of a serious dollar crisis.  The kind of dollar crisis that can result in a triple-whammy of pain for US assets: stocks, bonds, and the dollar dumped simultaneously.  Bottom line: It??™s about time someone, who can make a difference, to start getting serious about the world??™s money? 

John Ross Crooks III, Black Swan Capital