Malaise

GBP:USD has been undergoing an overall retracement since my post on the 13th, with some weakness post MPC minutes in the GBP on the 19th though the initial reaction was sell on the rumor buy on the news.

Risk aversion decreased the past two weeks from a combination of Geithner's nomination as Treasury Secretary (minor), the Citigroup bailout (major), and whatever mojo drives deadcat bounces.

I do think the retracement ends this upcoming week as the market returns to reality and I've been adding to a new short position on the GBP, averaged up to 1.5340, with a bit of dry powder left in anticipation of some violent gyrations in next week's snap back to reality (oh there goes gravity?). Look out below!

Another week another dollar (or is it pound?)

I expect this week to be extremely volatile for the GBP USD currency pair.

Overnight index swaps price in only 100 basis points of additional BoE interest rate cuts over the next 12 months to 2.00%, while BoE Governor King has indicated explicitly he would consider lowering rates to nearly zero to provide stimulus to the UK economy.

Hence the release scheduled for 4:30 AM EST on Wednesday of the BoE minutes from the last meeting's massive 150 bps cut will be crucial for GBP USD trading this week, as there is a clear divergence from the BoE Governor's stance and what the market believes the overall Montary Policy Committee's commitment to continued dovish behavior stands at. Should the cut vote be unanimous and the text of the minutes extremely dovish, we should expect to see continued GBP USD weakness possibly to the 1.30's by year end.

I will be short GBP against the USD on any GBP strength prior to Wednesday's release in anticipation of a very dovish set of minutes.

1-800 OK Cable

Time to close out the dollar long cable short, 1000 pips in 10 days, essentially straight down the last 5, just begs for some retracement. The inflation report by the Bank of England yesterday was wonderful for those of us short the pound and long the dollar but it is now priced in. The market is pricing in a huge rate BoE cut to the 1% area. Any sort of gearing with this trade ensured a huge two one week return, but pigs get fat and hogs get slaughtered, unless London bridge comes falling down.

Contemplating what domino falls next. I'm currently investigating life insurers on the short side, but there isn't much meat left on those bones.

You know the doo doo is hitting the fan when Japan is loaning out its foreign currency reserves to the IMF to "do what it feels is necessary".

Welcome to..

Welcome to U.S.S.A!

http://mwhodges.home.att.net/

Slightly apocalyptic but an interesting read.

Obama is largely responsible for the recent market downturn

Of all the nonsensical banter and useless commentary Larry Kudlow makes, this one takes home the grand prize: the stock market has been pricing in an Obama win and this accounts for a significant portion of the recent down turn (the implication being that if McCain were expected to win, the markets would have performed better).

Well, luckily we can test this statement....sort of. The prediction markets currently have Obama at 90% and McCain at a 10% probability of winning the presidential election. Come tomorrow, if pricing in the presidency has accounted for any significant portion of the markets movement, assuming everything else constant, the stock market should have large intraday volatility, as the expectation value will rise to 100% by the end of the day for either Obama or McCain, in fact we would expect a volatile market for an Obama win and an extremely volatile market for a McCain, win given current expectation values.

We shall see...I think Kudlow has turned into a bit of a raving maniac (perhaps he always was). I doubt a pricing in of an Obama presidency accounts for any significant portion of the recent down turn, rather it's been a whole lot of magic gone bad: magical accounting, magical bond ratings, and magical financial products gone awry.

btw: I just went short GBP long USD. Long story short, the whole of Europe is roughly 6-12 months behind the US in terms of economic fallout, and Britain, especially British property in the south of England, has been propped up by Middle Eastern petro money (look at PM Brown go begging to the Sheiks) that is now fleeing for the dollar. I expect the CDS auction for the three Icelandic banks to be disastrous (higher payouts on the part of CDS sellers than even the Lehman auction, something like 97 cent payout on the dollar with the debt worth 3 cents on the dollar) with a large ripple effect through Great Britain and the Continent. Frankly, Iceland is economically in the crapper, and I would bet top dollar that it will try to join the Europen Union (already it is a member of the European Economic Area). Things don't look so great for Europe at the moment.