Forex Investment and Currency Trading

NEWS

• Dallas FED Fisher: Still opposes further rate cuts. In an interview on Monday with Market News International, Fisher cited his concern about potential inflation pressures as a key reason that he dissented for a third straight time last week when the Federal Reserve’s policy-setting Federal Open Market Committee lowered its trend-setting federal funds rate. “Personally, I’m concerned about inflation and the negative feedback loop, which is that inflation leads to changes in consumption and business patterns that further retard economic growth as well as to pressures in the foreign exchange markets,” he said. “So that’s one of the reasons I’ve been resistant.” Fisher declined to say when he thought the U.S. central bank should start raising rates, indicating that he was uncertain about it. “Personally, I want to see these inflation expectations mitigated, and I need to think through, in terms of my input into the process, whether and when it makes sense to argue for increases as opposed to just stopping the cutting,” he said. Fisher said there were some hopeful signs in market developments that the Fed’s credibility as an inflation fighter remained solid, including lower gold prices and a recovery in the dollar’s value. “It may be that the recent statements made by the Open Market Committee and the recent actions are engendering greater confidence in the dollar,” Fisher said, adding: “We’ll see over time.”
• Bershire’s Buffett: Lower return expectations or sell the shares.  “There is absolutely no question” that Berkshire’s returns will decline, Buffett said. “Anyone that expects us to come close to replicating the past should sell their stock. It isn’t going to happen. I think we’re going to get decent results over time, but we’re not going to get indecent results.”  Berkshire itself had an ordinary first quarter, as profit declined 64 percent. Insurance premiums fell by more than half and Berkshire suffered a $1.7 billion pre-tax loss on contracts tied to junk bond credit quality and stock market indexes. Buffett expects those contracts to be profitable long-term.
• French PM Fillon: EUR overvalued, wants action  “We believe that the euro, globally speaking, is overvalued. We have been saying it, the IMF has been saying the same thing,” Fillon told a news conference in Washington ahead of meetings with U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. “The euro area, according to us, cannot bear the entire weight of the adjustment for all currencies,” Fillon said through an interpreter.

Most people never think about insurance until something bad happens.  The premise of the FX market over the last 3 weeks was that stability in equities and a pull back in commodities helped to bring back a carry trades, inspire a USD bounce and drive volatility lower. Today, the FX market is busy and the risk aversion trade is on.  The best trades other than buying longer dated vol in CHF and JPY are to buy NOK and CHF calls vs. USD in 3-6 month time.  This drive for USD weakness has three drivers: 1) Equities – they are down on the day – and 1390 SPX is a hot point to watch. 2) Oil and Gold – the correlation to these hasn’t died.  Oil to new highs is making it hard to believe in the USD and inflation battle.  3) Credit – the market started to turn sour yesterday and post FNM and UBS earnings and outlooks this market is back to fear beating greed. The two stories from the weekend that people may not have focused on – but both hit home on the themes above namely Buffett’s warning on future returns and the French PM’s push for a EUR top.  The most troubling story is from Fisher – who explicitly connected his view of credibility with the price of gold – that means trouble with gold up $9 and breaking back into technical support – what happens at $900.