Replies to post #2429 on Swing trading Canadian

[Croesus I]

Greenback key to economic recovery

Tuesday, October 07, 2008

Investors should take enormous comfort from the fact that the U.S. banking crisis has not morphed into a currency crisis, at least not yet.

The willingness of investors to buy U.S. dollars and invest in U.S. Treasuries will be an essential ingredient for an economic recovery.

The real danger signal would be marked by a lack of confidence in the U.S. dollar and a dramatic rise in the yield on 10-year U.S. Treasuries from their current rate of 3.48 per cent.

WHAT ARE THE EXPECTATIONS?

This is where Goldilocks and the three bears story comes in for the economy. Investors want to see government bond yields rise (the porridge is “too cool” now) as they pull out of bonds and move into other assets. But a dramatic surge in yield as investors lose confidence in the U.S. (the “too hot” scenario) would be devastating. Something right in the middle – “the just right temperature” – is what investors should be looking for.

“Unfortunately, we have all the ingredients in the U.S. and Europe for the greatest financial catastrophe in 250 years,” warns Peter Gibson, vice-chairman of Desjardins Securities and his portfolio strategy and quantitative team.

Those dangers are the ballooning U.S. debt, a liquidity crisis, the hedge fund crisis and risk of a collapse in consumer spending, which accounts for about 70 per cent of the economy.

“However, we still expect that the Fed will stabilize the financial system, and that with globally co-ordinated rate cuts and direct intervention in the distressed U.S. mortgage market, the S[amp]amp;P/TSX will rebound in 2009.”

The immediate dangers that could precipitate a historical crisis include a collapse in consumer spending and a run on a major bank or a sudden withdrawal of liquidity if investors and nations decide to no longer backstop the market for U.S. Treasuries, Desjardins Securities said.

Over the longer term, investors should monitor the yield on 10-year U.S. Treasuries, it said. A red light signalling a crisis would be if over the next 18 months, 10-year U.S. Treasuries rose in yield to 5.2 per cent at the same time the U.S. dollar was collapsing, Mr. Gibson said.

“Otherwise, we remain unconcerned about a falling U.S. dollar, if bond yields are stable.”
It would be healthy sign if the yield on 10-year U.S. Treasuries rose to a range of 3.8 to 4.2 per cent following cuts in regulated rates, he said.