Tuesday, January 29, 2008

Entry for Jan 29 2008

With perceived rate cuts tomorrow, much volatility is occuring in the FOREX markets. With tomorrow rate cuts the yen will appreciate more vs the dollar. Since the Japanese economy is perceived to be slowing down many investors flooded and possibly will continue to bid up other currencies such as the Aussie, the Kiwi, and Euro. Also, it is very possible that due to a perceived bottoming in the US equity markets that a better expected 4th quarter will cause investors to flood back to the US as it would be a great buying opportunity if indeed a bottoming occurred. This would be great for US equity or currency investors who bullish on the dollar.

Indication of an improved US economic conditions can be seen in the US durable good orders. As this also ties in to why the dollar is trading higher today. With a better possible outlook for the us economy and with mixed signals and possible slow growth in Japan the dollar is trading around 107.09 right now.

With such a high percentage or rate cuts priced in, the yen should appreciate more tomorrow. I do not believe the Feds will cut another 50 basis points. If they did,they would be losing face, their reputations are at stake. Who is leading who? Are the Feds doing their job maintaining stable prices and full employment, or are they there to cater to the financial market needs every time they are in trouble. Sooner or later the Feds are gonna realize the markets are crying wolf, as better economic reports come in.

Either way, I currently have an open short position on the USD/JPY pair expecting any cut will cause the dollar to weaken against major currency pairs in general. Although, I have a limit order just above support around 105.3, as i expect support to hold since the US economy is not as horrible off as perceived as indicated by the US durable good orders today.

One possible trade I am considering after this current trade is a long position on the USD/JPY. If 4th quarter results do surprise, I see a good buying opportunity for the dollar. Obviously I will have to get in before, so i will wait and watch news and politics for the next few days...

With this in mind a rate cut is will be expected, I feel that a 25 BP cut is what they should do. But, with recent actions of monetary policy it wouldn't be surprising if another 50 BP cut is decided upon. The Fed's hope of spurring spending is something that will happen, but with a lagged effect. If the feds keep cutting this will possibly lead into a hyper inflation environment with a bubblish bull market phase. Without letting the effects of the 3/4 of a point cut set in, along without letting the financial markets work out the problems, the feds would be crazy to cut more than 50 BP. Obvious speculators in equities would love to see another massive cut, but this is something that is not fundamentally warranted, but desired partly out of greed.

In reference to a time frame:
I will be more bullish for the end of the first quarter through the second quarter as of now. Obviously, I will update/maintain my position as more economic data and financial news come in. Although I am bullish, it is somewhat artificial since it is going to take along time before financial, housing, sub prime, or credit problems improve, as i must ultimately admit they will affect performance of the economy, but perhaps as not as bad as we all believe since people tend to get in herd mentality and get sucked into the bearish news the media focuses on and live confirmation bias.

So to make clear, I believe that US equities will perform well towards the end of the first quarter into the second, with low interest rates, and a better perceived economy, with possible lagged effects being felt from lower rate cuts (I would discount any tax rebate plans as they will have a limited multiplier effect, since most people would use the money to pay down debt or save in this bearish environment, and plus it would only be a quick fix, for a longer term solution investment must be stimulated to create jobs, labor market being key for consumption).

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