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Morning Notes For October 21st 2010 at Trader’s Narrative

Morning Notes For October 21st 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. I welcome your feedback in the comments:

Initial Jobless Claims: Survey 455 Actual 452 Prior 462 Revised 475
initial jobless claims Oct 2010
Initial Jobless claims appear to be locked in a range.

  • Economic data out of China was in focus and while GDP came in slightly ahead of print estimates (9.6% vs. St. 9.5%) expectations were elevated following the country’s rate hike on Tuesday, leading to some profit taking in China. Of the other key Sept. China economic figures, IP came in a little light, retail sales were stronger and CPI was inline.
  • Fed Article in the FT – says Fed officials are considering a more “flexible” approach to further QE. “Fed officials are weighing an approach that allows more discretionary meeting-by-meeting decisions than the unconditional “shock and awe” stimulus it launched during the depths of the crisis in 2008 and 2009″ – FT
  • Beige Book – hit late in trading on Wed - Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Economic growth at a modest pace was the most common characterization of overall conditions. Consumer spending appeared to increase on balance despite continued consumer caution. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Upward price pressures remained quite limited for most categories of final goods and services. – Federal Reserve
  • The U.S. Treasury delayed its semi-annual International Economic and Exchange Rate Policies report to Congress.
  • It appeared that in order to provide any basis for meaningful dialogue, a number of foreign countries were (strongly) requesting a statement from the U.S. Treasury supporting the dollar. Secretary Timothy Geithner made comments speaking at an event in Palo Alto, California. He indicated the U.S. will preserve confidence in a “strong dollar” (not the strongest “strong dollar” comment ever uttered) and that the U.S “will not engage” in currency devaluation/depreciation. – Bloomberg

7 Month daily chart of US Dollar Index (average exchange rate between six currencies)
US dollar index Oct 2010
An orderly decline is fine but we don’t want the dollar’s decline to become precipitous. Down 13.37% in less than 6 months is a significant move and the latest knee-jerk bounce appears to be failing. What would make the $’s fall become precipitous? Global investors dumping $ assets. That is, admittedly, a scary scenario, particularly considering that sovereign wealth funds have explicitly stated that they want to diversify out of dollar assets. It’s not all doom and gloom as the benign scenario of an orderly decline is also the more likely one. And that is a relative positive for the US as a weaker dollar could give a boost to domestic growth (in the near term it reduces the drag on GDP from the contribution of net exports) and helps our multinational companies. That is probably what Geithner wants and that is why he makes these toothless strong dollar comments.

Taking a step back, it is important to remember that prior to the credit crunch and the resulting ‘flight to quality’ of dollar assets, treasuries, etc. the dollar was significantly weaker than it is right now, as shown in the four year chart of the dollar index to the right.

US dollar flight to quality 2008

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One Response to “Morning Notes For October 21st 2010”  

  1. 1 Tiho

    “…and the latest knee-jerk bounce appears to be failing.”

    You shouldn’t write the Dollar off that quickly, it is just building a short term bottom around here. Crude Oil, Gold, and Copper have already started falling. So has the Franc and the Pound. Long Bonds and Stocks are about to join in too. Same with the Euro and the Aussie Dollar.

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