Casual Causality

Daily Forex Fundamentals | Written by Foreign Exchange Analytics | Sep 11 08 15:01 GMT |

The financial press is only as good as its sources. Unfortunately too often the crowd is too quick to offer causality too casually, confusing motivations for trading with a llitany of at hand fundamentals. I am ready to pop over the utter nonsense that euro/dollar is down 20 cents in 8 weeks (GBP, NZD, JPY, BRL, TRY, ZAR, XAU, oil, equities) on evidence the global economy is slowing and the world economy has not decoupled after all. Gag me with a Blackberry. I am not claiming a monopoly on intelligent causality... I get things as wrong as the next person. But I do think there is a story on financial markets that is not being told that goes a long way in highlighting why fundamentals are not telling us much about currency and asset price movements. The global financial system runs on trust and there is a complete breakdown in trust - in the counterparties and policymakers that support and impact asset prices. What we are watching is 95% running from risk and 5% weak economic data from Germany and the Euro Zone in the last two months. This is still mainly a market where the credit crisis is still ruling the roost over asset prices and FX, not textbook macroeconomics... .we will need the econ 101 textbook in due course just not yet. Banks, non-bank financials and large international firms fund themselves in dollars. The credit crisis is eliminating dollar wealth creating a massive shortage of greenbacks... wealth destruction in structured products, real estate, commodities, carry trades and equities. Cash is king and yet cash is not in hand - much of it is locked up in illiquid assets in bank balance sheets and banks need dollars. Starting with the banks rushing to buy dollars, the rest of the world (corporations and real money accounts) is finding they too are in need of dollar cash balances. Add on top of the wealth destruction the broader rush from risk and low and behold the yen is soaring and EM FX plummeting. What weak data is Brazil reporting to explain why the BRL is tumbling? Copom hiked this week and firm GDP figures were printed for Q2. Foobah fundamentals. I get a lot of wisecracks from readers and non-readers about why being long dollars is so obvious and when I get bullish it is time to sell. Well folks the risk ahead is that as global supply of dollars shrinks at an unprecedented rate via asset deflation and the dollar rises the fastest since the Plaza Accord in 1985, this is not the sign of a strong currency or faith in the US economy (fundamentals). It is thoroughly defensive. When the US government balance sheets explode in the next 12 months behind bailouts, fiscal stimuli, housing support measures including Fannie and Freddie underwriting, and the unemployment rate reaches 8%, the dollar will be falling from helicopters and B-1 bombers as Ben takes to the air and the US inflates its way out of a deep recession and enormous debt burden. David Gilmore Foreign Exchange Analytics http://www.fxa.com Disclaimer: The opinions expressed herein are those of the author and not a recommendation to buy or sell specific securities.