FX outlook for week of 30 March 2008

Jeff Miller has been around for awhile and I love the way he thinks. Something he wrote this week has once again got me thinking:

Reading sell-side analyst reports is a lot like reading seminar papers.  Over twenty years in the business we have read thousands of these reports, usually examining several on the same stock.  There is always evidence and logic, leading to conclusions.  There are also assumptions.  These assumptions relate both to facts and to methodology.  Sometimes the analyst has been pushed into unfamiliar territory.  It is always tempting to follow someone who has had a hot hand.

This is the perspective I take when reading any sell-side research. (Or buy-side research, for that matter.) That said, I’m a definite junkie (and I never miss out on A-dash). I know some people think reading analysis and commentary is a waste of time. All of the people I know who are successful traders read a great deal of this analysis. (Incidentally, they are all empirically-based discretionary traders. The system traders I know are barely breaking even…a rant for another time, maybe.)

So here I am, conducting my weekly research before the session opens in Auckland (where it is currently 2330). Last week was interesting from an observer’s standpoint. (More interesting than my trading results, to be sure.) Here is a brief summary of my impressions while scanning the Sunday news:

Traders have not yet bought into the most recent of the FED’s life-rafts, on March 18. The raft is still floating, but there is no land in sight…as far as a panicked market can see. There are some who think they may have spotted something like land on the horizon. We’ll see whether this sentiment develops into anything significant in the coming weeks. I think they are simply seeing another storm — whatever it is needs to get a little closer before I can really know. And whatever the case may be, fundamental factors in confluence with key levels seem to be fueling increases in risk apetites (however small). This means there is a good chance for more volatility in the spot markets this week.

Last week a research unit at Goldman Sachs estimated the total losses of the credit crisis would be around $460B. Today, a German financial supervisory authority, BaFin, esimates global losses to be in the neighborhood of $600B. This is, according to the report, a worst case scenario. Less than half that figure has already been reported, but private firms are unlikely to make their writedowns public. Let’s see how this story unfolds over the next few days.

The Fed may be signalling that it is at the end of its emergency rate cutting and will allow time for its liquidity measures (auctions and rate cuts) and this year’s tax rebates to take effect. It will also begin to manage public perceptions. There are still TAF auctions to conduct over the next four to five months, however. There is disagreement among FOMC members about whether the Fed has gone too far.

The US has an overnight rate of 2.25, an annual GDP growth rate of 0.6%, an annual CPI rate of 4.1%, a monthly unemployment rate of 4.8% and a monthly trade balance of -58.2B dollars. It has the lowest growth rate, the highest inflation rate, and of course the largest trade imbalance of any of the majors. Its unemployment, however, remains low with Australia (4.5%), Japan (3.8%), New Zealand (3.4%) and Switzerland (2.5%) being lower.

Developing….