...we are big believers that after following the chain of price action, sooner or later, it all comes back in some way to the rate of interest. Interest rates are the core of all things financial, though the link may be seemingly distorted at times.

From Bloomberg this morning:

Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars.

The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10.

Now take a look at a very interesting chart next page from the excellent economic research team at Northern Trust which shows the 3-month Libor minus the 3-month US Treasury bill as another way of viewing credit market tightness:

Diagram 1 Click to zoom.

Now take a look at the chart above compared to the Dow Jones Industrials Average Inverted chart below. We have inverted the chart so you can see the visual correlation with the chart above [by inverting it means the line going down represents the DJIA going higher]:

Diagram 1 Click to zoom.

...and of course, because our morning missive is supposed to have something to do with currencies, we look at the US dollar compared to the stock market in the next chart; the correlation has been quite tight lately...

Diagram 1 Click to zoom.

So, is there a point? Well, we think the point is this:

• As credit markets normalize, it allows stocks the opportunity to make that much needed bounce, or correction, as they are extremely oversold on most measures.
• And as stocks correct, it by definition represents an abatement of fear, or at least ebb in said fear.
• Then, the risk aversion trade i.e. pouring into the dollar and Japanese yen to hide from fear, may go on holiday.
• Thus, we have the interest rate link back to the good old US dollar and why we still guess a playable correction is in order.

But, of course it is a story. Mr. Market isn’t cooperating so far this morning as both the yen and buck are the strongest in the pack. But stay tuned. The next ten minutes in this market can change the picture completely. That's what we call volatility.