• Key Reports (WSJ):
7:45a.m. MBA Refinancing Index. Previous: +3.5%.
2:15p.m. Two-day FOMC meeting continues, interest rate decision expected.

Quotable

"All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome."

   George Orwell

   
FX Trading – Is Mr. B in a Box?

Some traders seem to be envisioning a “lose-lose” scenario for the dollar seeing it  damned if Mr. Bernanke does cut rates, and damned if he doesn’t.

More pounding in the housing sector raises Mr. Greenspan’s recession probability.   If Mr. B moves quickly to stem that, with a Fed cut, and in the mean time soothes the liquidity needs of the hedge fund holding the subprime mortgage bag, global risk resides, the dollar gets battered on yield and growth concerns.  The move in high yield currencies of the last several days may be telling that story.

If Mr. B decides “inflation risks” are the pressing concern, and decides to show what the moral hazard thing is all about i.e. not coming to rescue every two bit 100 billion dollar-plus hedge fund in town and their trusty sidekicks known as the brokers; housing craters faster as funds dry up.  This action, many believe, only pushes a rate cut out into the future, says the second side of the dollar “lose-lose” scenario.

But, there are other scenarios:

1) The dollar rallies if hedge funds start running for liquidity again (Treasuries as safe have mean money moves into dollars despite all the warts showing in the U.S. economy)

2) The U.S. economy fools the crowd again—Mr. Consumer steps up and pulls yet another rabbit out of his hat; he’s done that more than once. 

So, maybe Mr. B has more options than meet the eye.  For now, it’s not looking pretty for the dollar, but tomorrow is another day—and that seems plenty of time for at least two or three new fundamental themes to be hatched, then disposed of, by then.   

Jack Crooks