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Currency Currents

FX Trading ??“ It is to laugh??¦

(WSJ) 5 Nov 07: Hong Kong's benchmark Hang Seng Index fell 1526.02 points, or 5.01%, to close at 28942.32. Losses were further fueled by news that China's Premier Wen Jiabao holds a number of reservations about a plan to allow mainland investors to buy Hong Kong-listed stocks. That plan has been expected to draw billions of dollars worth of capital into Hong Kong's stock market from mainland investors and has contributed to a surge in Hong Kong stocks in recent months.

???We should make scientific judgment and analysis on what impact the massive funds flowing into Hong Kong??™s financial market would have,??? said Hong Kong??™s prime minister Wen Jiabao.

We have an idea.  How about if we send over a couple of financial ???engineers??? from Merrill and Citigroup to do a ???scientific??? analysis?  Seems they may have a few ???engineers??? to spare.

A down and dirty unscientific analysis from non-engineering types might go something like this??¦

Money runs from Chinese stocks.  Said Chinese stocks, already extremely bubble-icious, then do what happens when demand declines and selling pressure rises??”fall.  And said fall in mainland stocks and attendant liquidity might not be a good thing now that Westerners are having a little trouble getting the derivatives credit making machine back on track. 

Credit concerns are back on the front burner.  All the big boys are coming clean about the extent of the exposure.  But as we??™ve said before, with $415 trillion estimated nominal in global derivatives, there have to be a lot more bombs out there.

Risk aversion asset class direction changes, our guesses:

Stocks down - everywhere
Treasuries up
Junk bonds and lower rated corporate down
Crude down
Gold ? (Risk role or liquidity role)
Commodity dollars down
Japanese yen up
Swiss franc up to neutral
The dollar catches a safe-haven bid.

We know what you are thinking??”the US as safe haven? 

Here??™s the simple and unscientific logic providing a thin reed of support for US safe haven bid:

Though the impact of financial market turmoil in Asia will be labeled a simple ???correction??? by the Tout TV crowd, the mechanisms that transmit pain to the real economy from the financial economy is no different in Asia than it is in Western markets.  And given that Asia still has not developed much in the way of depth in its capital markets, things have the potential of changing very fast.  But most believe it can??™t happen because of China??™s perceived omnipotence. 

And maybe the crowd is right.  Maybe China holds it all together.  But, from a risk/reward standpoint, if they are wrong, it sure sets up some great trading opportunities.

Jack Crooks
Black Swan Capital