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Exchange rates are in turmoil. This week there are some historical highs and next week we might see others (probably on the same currencies). The Dollar is at historical lows relative to the Euro and the pound. You get now 1,36 dollars per Euro and 2 Dollars per each sterling you have in your pocket.

This turmoil seems that is better explained by a US dollar problem: low growth and high external deficits in the US. Moreover and related with these arguments there is an expected reversal of the returns on each currency. The monetary/interest rate cycle is expected to reverse, with the Fed probably lowering rates (despite the stubborn and firm resolution of the Fed against this market view) and the UK and Euroland going towards further hikes. In the UK higher than expected inflation is motivating higher rates. Whereas in Europe

26
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Astroc y estar en el filo de la navaja

Escrito el 26 abril 2007 por Javier Vega Fernández en Corporate

Un ex alumno me escribi

24
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Friedman is back in the UK

Escrito el 24 abril 2007 por Juan Toro en Financial Markets

Some economists are worried in the UK because of the high consumer price index growth, well above 3 %. They are also very unhappy in relation to what they believe to be the main drivers of this inflationary process: high liquidity expressed as a high growth of a monetary aggregate (in this case, M4 which represent a wide measure of money). They are expressing an old view much stressed by Milton Friedman: inflation is mainly a monetary phenomenon and too much money in the economy is generally translated into a high inflation rate.

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19
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When inflation forces you to write letters:

Escrito el 19 abril 2007 por Juan Toro en Uncategorized

The UK economy is heating up with effects on foreseeable interest rates increases and exchange rates. May be this could be a lesson for others. The reference inflation figure has overshot the target set by the Bank of England (BoE) and the pound is now trading well above 2 dollars. As a journalist reports:

16
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La formaci

Escrito el 16 abril 2007 por Juan Toro en Financial Markets

Por Jaime Pozuelo-Monfort. Ingeniero de Telecomunicaciones, m

16
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Another hedge fund clone

Escrito el 16 abril 2007 por Juan Toro en Financial Markets

Bearn Stearns has launched what it supposed to be the first Hedge Fund clone for individual strategies within the fixed income arena. The name of the clone is MAST and trades back and forth the spread of the two swap spread against the ten years swap spread. Entry and exit level are described very succinctly in terms of some moving average crossovers. For the 10 years period of the back test they have reported a return of 5,1 per cent over Euribor after fees and with a Sharpe ratio of 1,76. That is not bad performance and the return to risk ratio is pretty good.

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6
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Mixed numbers and the US economy seems healthier

Escrito el 6 abril 2007 por Juan Toro en Financial Markets

The much waited employment report was released in Good Friday with almost of the markets closed and traders on holidays. Still there was a strong reaction to a very healthy number than takes away any possibility of interest rates reductions from the Fed. Greenspan prediction must wait at least one more year given the low unemployment rate reported this Good Friday. Farm payrolls came in at 180 000, well above the 130 000 analyst consensus. Moreover, there were upward revisions in the previous month

4
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The WTI-Brent spread

Escrito el 4 abril 2007 por Juan Toro en Financial Markets

WTI- Brent future option spread is trading at a 3 dollar discount, meaning that the front Brent future contract is $ 3 more expensive than it corresponding WTI contract. Generally WTI is a more expensive oil because of its gravity and sulfur content and the Brent contract trades at a discount over the WTI. In the last week since the Iran hostage crisis the Brent-WTI has widened breaching the three dollars. This width is large by historical standards and probably many investment firms have been caught in this widening. Mostly those doing convergence trades has seen how the spread widened and did not corrected from unusual deviations. Few reasons explain this divergence: a) the Brent is more affected to oil disruption from Iran; b) the congestion at Cushing in Oklahoma were the WTI is delivered ; c) the strike in the Fos-Lavera port.

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3
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Oil

Escrito el 3 abril 2007 por Juan Toro en Financial Markets

The recent spike in oil prices has been pretty steep in a very short time. May 07 WTI (West Texas Intermediate) prices closed at $ 66.03 on Thursday. But what is more worrying is that the May 07 Brent settled almost two dollars higher. Several reasons seem to predict moves above $70 as we saw last summer.

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1
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An unnoticed strike

Escrito el 1 abril 2007 por Juan Toro en Financial Markets

Workers at the Port of Fos-Lavera, close to Marseilles, have been in strike for about two weeks. This event has been unnoticed in the press though it is difficult to distinguish the effect of oil prices due to geopolitical tension in Iran with the effects of the strike in the Fos- Lavera port.

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