Daily Forex Commentary
By Jack Crooks

Key News
- The dollar, in fact, has risen against its major competitor, the euro, and the yields the US government pays on its debt have fallen. That, say economists, represents an implicit vote of confidence in the ability of US markets - and US institutions such as the Federal Reserve - to weather the storm. (WSJ)

Key Reports
7:45am: ICSC chain store sales index for the week of August 18. Previous: -0.9%.
8:55am: Redbook retail sales index for the week of August 18. Previous: -0.6%.
5:00pm: ABC/Washington Post consumer confidence for the week of August 19. Previous: -11.

Quotable
"You cannot depend on your judgment when your imagination is out of focus." - Mark Twain

FX Trading
The dollar bears are feasting ... but yin and yang are still out there.

As you know by now, we are big believers in developing alternative scenarios - this is usually defined as market skeptics. But it's not quite that simple. We realize price action is the final arbitrator of "right" and "wrong".

And we know the consensus can be right for a very long time. How else do you explain the Nasdaq run until its peak in 2000. We all knew it would end badly, but no one knew when it would end. Are we in one of those times for the dollar?

Everyone knows the dollar is in a multi-year bear market. And most have been riding it down and benefiting from it. And the more they have benefited the more in love with their own stories they have become.

Making money does that. It validates rationales no matter if the underlying rationale is the key driver of a price trend. And if you are riding the price trend, it matters not if you rationale is right. Thus, a feedback loop is created. And it's why people who have played this game long enough truly believe it when they say, "It's better to be lucky than good." The judgment of "good" only comes in hindsight.

Okay, that being said, here's a story the consensus finds very palatable. The US dollar will again turn tail and run off the cliff because once the dust settles the US economy is heading straight into recession. In short, for any of you who might believe there's a chance the dollar could rebound, do not pass "go", and do not collect $2 billion.

After all, the Fed will be cutting rates so the dollar will lose both its yield and growth appeal relative to its major competitors and the current account bogey man lingers in the background.

Here are the implicit assumptions supporting this view and some of our commentary and thoughts to counter as an example:

The US will decouple from the rest of the world. It means the rest of the world will still be humming along just fine if the US goes into recession. Europe, China and Japan will take over the wagon-pulling. They have plenty of growth momentum.

This idea has joyfully lingered in the financial press and the minds of others trying to support their own stories for some time. After all, international equities have to be sold to American investors in all kinds of ingenious ways. If we learned anything from the latest subprime debacle, global financial markets are as tightly linked as ever - maybe even more so thanks to the daisy-chain of derivatives.

Until proven otherwise, stay open to the adage that has stood the test of time: if the US sneezes, the whole world catches a cold. So the next time you see a "global investing expert" on CNBC or Bloomberg TV telling (really preaching) you to get out of the everything in the US - it's going to hell in a hand basket - think about how much more money he may be making if you follow his advice.

These are usually the same kind of guys who love gold, hate the dollar and think the current account is the devil reincarnated. They have a biblical zeal to their arguments. This doesn't mean they are wrong, a broken clock is right at least twice a day, but it should be yet another one of those "Danger Will Robinson" moments for you as an investor - especially as a currency investor.



Three points to consider about the current account (not saying they are true):
1. The current account deficit is not a reliable indicator to trade the dollar. In any time-frame we've looked at it, it hasn't helped.
2. It's not impossible for the current account to actually improve. As you can see in the chart above, it has improved slightly since last year. A new trend could be emerging.
3. What if the US current account deficit is the grease that lubricates the wheels of the global growth wagon, ie all those dollars being pumped out there play a big role in liquefying the global economy.

In a world where we already pointed out that it's "at the margin" increases in liquidity that matter, a US slowdown might just mean the current account improves for the US but drains dollars for others to use. Thus the decoupling argument takes a broadside.
Anecdotal: when Japan went into recession in 1990, its currency rose in value relative to all the other majors.

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