FX MARKET COMMENTS --GOLDMAN SACHS May 27, 2009
Some would say that today was a bit like a philosophy of religion class. Either you are a bull and are long equities, short bonds and short the USD or you are a doubter waiting to see the light. This reminds me of Pascal’s Wager. If you can’t tell if God exists through reason alone then its like spinning a coin at the far end of “infinite chaos” praying for it to come up heads. How people wagered today was clear from the outcome. This is how Pascal would explain the price action in markets today against his arguments for God’s existence. Pascal suggests that because neither choice affects our reason, we should look at the likely payoff in terms of happiness. If we believe in God, and there is a God, we get infinite bliss. If we believe in God, and there is no God, we get nothing. If we doubt God’s existence and there is a God, we get infinite torment. If we doubt God’s existence and there is no God, we get nothing. Seems like the betting was logical after all – as what today was all about is confidence in the future – witness the confidence data. The data allowed some modicum of faith and that was all that was needed to drive equities in the last week of a long month back up despite a world of real concerns with North Korea or deflation or subpar growth or too much debt. Perhaps the most important story that didn’t get the headlines above but the attention of the markets was the successful $40 bn 2Y US Treasury Auction. This may not be the same outcome tomorrow or Thursday but bond holders live one day at a time. This won’t be a story that won’t have doubters for a long time as the US tries to borrow $2 trillion over the next year or so. The staggering amount of debt mixed with the clearly mixed economy makes many see the USD as the logical way out. Problems can’t always be answered with logic – as we learned today. So the USD running from EUR 1.40 to 1.3850 and back today was de rigueur.
As the world turns we will get plenty more chances to bet and to find out if investing in the US or USD is about true belief or if its better to be an agnostic. Expect the Japanese trade data, German CPI and the US housing sales to set the pace for the 5Y auction tomorrow. Bottom line – the market in equities rallied over 2% today with light volume making many nervous. VIX settled at 30.6 – not low enough to make people rush for a bigger move but on the line for doubters. USD crashed and gave back all its hard earned weekend gains from the North Korean nerves. Bonds rallied a bit but then gave it all away with equities driving, but the 2Y rallied significantly after supply met more then expected demand. There is no reason to doubt the tape – its clear – this is month-end and money is being put to work.
