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     Jul 18, 2007

Daily Forex Commentary
By Jack Crooks

Key News
- Investors in two troubled Bear Stearns Cos hedge funds that made big bets on subprime mortgages have been practically wiped out. (WSJ)
- Morgan Stanley economist Qing Wang said it is unlikely that China will allow a one-off revaluation of the yuan this year. "I think in the remainder of the year, we will see continued gradual appreciation of the currency. A one-off revaluation won't help address the problem unless the one-off revaluation is very large [about 20%], but I don't think Chinese authorities are prepared to make that bold move," Wang said. (The Standard)
- "The Singapore dollar is also attractive as a funding currency because of its lower volatility, slightly below that of the Taiwan dollar and significantly below that of the Japanese yen," Citigroup Inc economist Chua Hak Bin wrote in a note to clients yesterday. (Bloomberg –Andy Mukherjee)

Key Reports
7:00am: MBA refinancing index. Previous: -3%.
8:30am: June consumer price index. Expected: +0.1%. Previous: +0.7%.
8:30am: June CPI, ex-food and energy. Expected: +0.2%. Previous: +0.1%.
8:30am: June housing starts. Expected: -1.6%. Previous: -2.1%.

"Politicians can proudly proclaim their gifts to the world, and never worry about the source of funds, nor weigh the gifts against alternate choices. They simply get to give, smile, and sit back to receive the accolades that fall at the feet of the political don. What a life - though a life devoid of reason and reality. We are continually emasculated by DC thugs who steal our dollars and then hand them out as their own, leaving us to distribute whatever change is left in our pockets." - Jim Fedako, (www.mises.org)

FX Trading –stocks adjusted by the dollar!
In case you missed it, unlikely unless you've been visiting another planet lately, the stock market is on a tear. The Dow Jones Industrial Average poked its head above the 14,000 barrier on Tuesday, but settled in for the night just below the rarified mark.

The Dow and the Transports have once again confirmed there is more to go on the upside, no matter the increasing frequency of nosebleeds.

Thinking about this, and thinking about the dollar as we always do (occupational hazard), we wondered what the Dow Jones Industrial Average would look like if we adjusted it for the fall in the dollar. So, that's what we did.

In the chart below it shows the Dow Jones Industrial Average (black line) compared to the Dow Jones Industrial Average Multiplied by the US$ Index (red line), both are a monthly price series. What we noticed is despite the very nice surge in the unadjusted Dow, when adjusted for the falling dollar it is still well off its old highs made back in May 2000 ...

Anyone care to offer some conjectures, implications, guesses, or logic ...

Our attempts are these:
1. Stocks represent ownership of real assets in the real world. And said assets (just like gold) should reflect "real purchasing power". Thus, a falling dollar means said assets should go higher, all things being equal (ceteris paribus for the economic literati among us).
2. International investors see the Dow as cheap thanks to said dollar demise.
3. The P in P/E (price earnings ratio) is bid higher precisely because the E in the equation is rising thanks to a falling dollar. And of the E generated from overseas sales relative to domestic tends to rise because currency translation benefits back into dollars. When the collective Ps for multinationals (which are a very big part of the Dow) are bid up, the index follows in kind.

The $14,000 question is: Does the Dow get hammered if the dollar ever stages a rebound? Over to you on that one!

Below is the same chart above with our hero, the dollar, overlaid in blue:

You may also notice we added a bit of commentary. The "launching pad" for stocks, which we consider to be the emergency Fed Funds rate pushed down to 1%, allowing Mr Alan Greenspan to save the world from "deflation". This coupled with the enormous surge in sausage derivatives manufacturing.

Anyway, if you're bullish on stocks it's likely the dollar trend is your friend. If you're bearish the news that Bear's subprime hedge funds are going belly up may make you feel better.

As they say, choose your poison!

Black Swan offers a subscription-based currency advisory service for forex and futures traders.

Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm - BlackSwanTrading.com



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