FX Trading ??“ Same game?

Fed Funds rate cut by 25 basis points ==> Discount rate cut by 25 basis points ==> Fed statement reveals a hint of hawkishness ==> dollar falls.

Trading was heavy in the wake of the FOMC announcement, but direction was lacking before traders eventually moved against the buck.

The Fed did, however, make an attempt to cloud up expectations for future policy decisions. There acknowledgement of inflation threats went as far as mentioning rising commodity prices. Regardless of their words, their actions do nothing good for the buck.

It??™s our view that investors aren??™t going to act differently until monetary policy changes. Despite the relatively hawkish language, the market seems to expect rate cuts to continue.  For this is a game about both rates and economic growth; both are key currency drivers.  Lower growth expectations beget lower rate expectations and lower rate reality begets lower growth expectations??¦.

It is a self-feeding rationale.  And at this stage, maybe a rate hike from the Fed is the tough love needed to turn this puppy around.  Neither we, nor the market, see that on the horizon. 

So we play the same game the markets have become so accustomed to: sell the dollar but beware of the goodwill bounces.

The market-watchers will again be champing at the bit today and tomorrow morning ahead of the U.S. non-farm payrolls report for October. A preliminary employment report by ADP suggests the job numbers will come in roughly near expectations.

But as always, the jobs numbers are never taken lightly and always have the ability to surprise the markets. Risks for a surprise from Friday??™s release lie to the downside.

Investors are most curious how the housing market, subprime-related losses and rising oil prices are affecting U.S. consumers. Most would believe consumers are inching dangerously close to a breaking point. After reading a report revealing third quarter foreclosures in the U.S. climbed by a whopping 100% from a year ago, I??™d have to agree.  This is why the jobs report looms large.

The euro has reversed course after the knee-jerk reaction on the FOMC announcement. It??™s come down off its highs overnight and this morning.  Is it a correction that refreshes?  We know 1.4500 has to be considered key resistance for the euro.  Or is it an indication the US economy just might be in better shape than everyone expects.  After all, the GDP report wasn??™t shabby yesterday.  Hmmm??¦

 
Stay tuned.

John Ross Crooks III, Black Swan Capital