Jack the Pipper

If you’re a currency trader that became tired of only hearing about interest rates … or tired of only hearing about the carry-trade dynamic … or tired of only hearing about yield differential as the primary force impacting the foreign exchange market, then the global lending crisis and impending economic meltdown has offered a refreshing change of pace!

I received an email yesterday, from a very smart man who happens to be a professor of sciences in one our top institutions. He wrote: “Been stunned by the number of free market folks who squeal for interventions.

So what’s changing? Well, credit market indicators have improved. The first signs of improvement came as last week finished up. And so far this week the improvement has stuck.

Interesting! It seems the chances for another Asian-style financial crisis lingers and is rising (we are already seeing it in S. Korea; chart below). This is surprising since it appeared the entire region was well position to whether a downturn in the major economies–at least the view before the downturn morphed into an all out assault on all the ties that seem to bind the global financial system together.

Global shift in consumer sentiment and an unknown quantity of toxic paper still buried make us believe any recession will be more L-shaped rather than V-shaped recession.

Looks like someone popped the champagne cork too early. I say that because stocks made short order of Monday’s record climb. On Wednesday, the Dow dropped the most in 21 years. The plunge of over 700 points erased over a trillion dollars in market capitalization – only the second time that’s happened … ever.

Of course we wouldn’t ask the question if we didn’t believe the chances are good. But, the major caveat is the same we’ve shared before–in a fundamentally-driven market (or major event-driven) the technical analysis takes a back seat.

Last week there was a huge cooperative among the world’s central banks to cut interest rates. Central Banks in the US, UK, Sweden, Eurozone, Switzerland, China, South Korea, Taiwan and Hong Kong all got involved.

I guess that little coordinated interest rate cut thing didn’t do the trick. But don’t despair citizens. Right now he’s strapping on his cape to prepare for yet another episode of “The US Treasury Saves the World” news conference to explain why the latest scheme hatched in the last 15-minutes will be just the ticket.

As the stock market goes, so goes the euro against the US dollar. Can it be that simple? Short answer is yes. Risk aversion right now is dollar positive. And falling stocks are the best general definer of a risk adverse environment