Foreign Currency Exchange Outlook

Foreign Currency Exchange Outlook : The calendar is rich today, with Q2 “advance” GDP probably the one with the potential to move the Foreign Exchange market. The consensus is a real 2.3% y/y, based in part on $78 billion in stimulus checks, so a bad number (under1.5%) would be dollar-negative. Bloomberg reports that the survey range is a wide 0.9% to 4.2%. Obviously, 4.2% would be dollar-favorable. Market News has a forecast range of 1.7% to 3% and a median of 2.1%, and notes that “The lowest GDP estimate is still far higher than the 1% final seen in Q1 2008 and +0.6% seen in Q4 2007.”

More interesting is the question of how you can have a recession without getting the conditions that define a recession—two quarters of negative GDP.

There is a sense that you can have a recession without meeting the definition if everyone agrees it feels like a recession.

We do not agree. Definitions count. If GDP is not doing the job, get another definition. How about falling employment or rising unemployment? We think employment is probably lagging and not leading, but let’s say for the sake of argument that it’s a good indicator. Today we get first-time unemployment claims— with the forecast for a 9000 drop instead of the usual rise. So that one doesn’t work, either, at least not this week and not if you have a bias to find recession somewhere, anywhere.

Golly, maybe we don’t have a recession.

Economists, according to a Bloomberg survey, put the odds of a recession down at about 50% from 70% in April. The NBER is the arbiter and sticks to the idea that recession is a “significant” drop in activity over a sustained period of time, usually taken to mean 2 quarters. Decline should be visible in GDP, payrolls, production, sales and incomes. Well, we’re not getting it except in employment, where job losses are about 500,000 so far this year, according to Bloomberg. A lot of time is being wasted looking back at the 2001 recession, which was over before the NBER had decided on using the word. Merrill Lynch’s Rosenberg, however, points out that Q1 2001 GDP was originally reported up 1.2% and only later revised down to a 0.5% drop.

The world is gradually changing cyclically. Emerging markets like China and India are in more trouble than they are admitting and can be expected to slow down. Western economies are stable and not as weak as some headlines would try to scare us into believing.

A commodity bubble bust would be healthy for everyone and help restore some balance, but the status quo before the oil crisis was not exactly stable and balanced. With various factors in a topsy-turvy condition, including the Fed lending buckets of money practically to all comers on questionable collateral, we are having a hard time believing in the US dollar rally. Oil simply must resume its downmove for the dollar to hang on to gains, let alone make new ones.
Weirdly, we have two medium-term technical analysis systems.

One has a strong sell signal and the other has a strong buy signal.

This is maddening. Watch out.

If you are risk averse, this is a good day to get square and stay that way until Sunday night.

Buy for Now

Barbara Rockefeller

oil is down some more

The Sept NYMEX crude oil contract settled down $2.54 at $122.19, the lowest since
May 6 and is down $25 from the July 11 record high. This morning, oil is down some more to $121.71 at 11:06 am GMT ahead of the US inventory report. We know demand for gasoline is down for the 14th week (per Mastercard) and Bloomberg reports gasoline supplies are expected up 400,000 barrels for the 5th week of rise.

One analyst says the next layer of support is at $117.

Bloomberg reports that US drivers drove less for a seventh consecutive month in May. According to a government report on 7/28, vehicle-miles fell 3.7% y/y in May, the longest streak since 1979. Also, the Energy Dept said demand for oil and petroleum products dropped 4.3% y/y in May to 19.7 million barrels a day, or 889,000 barrels a day less for the first five months of the year over the same period a year ago. This is named demand destruction.

Exxon and Chevron will report the lowest production since 2005, with Q2 output down over 5%, so that earnings depend on price rises. According to analyst reports summarized by Bloomberg, together they will spend about $48 billion on capital outlays this year, which sounds nice until you discover that they are spending even more to buy back their own stock, a disclosure we first read in Portfolio magazine. Together they are spending about 100 million US Dollars a day on capital spending for exploration and produc-tion—but “If it maintains its first-quarter pace of buybacks, Exxon Mobil will repurchase 38 billion US Dollars of stock this year, or almost $104 million a day.”

There’s something wrong with this picture.

Italy forced out of the Euro

Market News reports that the UK newspaper The Telegraph says Italy is sliding into a deep structural crisis and risks being forced out of Europe's monetary union as the region's economic downturn gathers pace, citing a new report by Capital Economics.

We say the idea of a country leaving the EMU, whether Italy, Spain or Ireland, is dumb and it ain’t going to happen, but that doesn’t mean a mile of newsprint won’t get wasted on it.

For Best Euro Exchange Rates visit IMS Foreign Exchange

We like the US Dollar rally

Foreign Exchange Currency Outlook : At 8:15 am today, ADP Macro releases its estimate of private sector payrolls (to be released Friday morning). We hate to admit it, but it’s an important number. It’s disheartening that economists, even economists with a very big amount of inside information like ADP, do such a bad job of forecasting this piece of data.

One of the issues with the ADP Macro information today, GDP tomorrow and payrolls on Friday is that each one of them has the power to reverse the psychology of the currency market in a nanosecond. One day we are all wailing and moaning about less than half of subprime losses disclosed and the IMF saying the financial crisis is not over by a long shot, and the next day we are all rallying the US Dollar like mad on rising stocks and falling oil. We need to mention that a steady diet of bad news out of Europe is helpful to the dollar rally, since foreign exchange traders perceive the US is closer to the end of the “recession” than Europe, while Japan is just starting.

This flip-flopping and zigzagging is unhealthy. Normally it takes a much longer time, a few days at least, for sentiment to reverse. We like the US Dollar rally but feel that it’s fragile and vulnerable to a crash if some piece of really bad news comes out of left field. As Mr. Malkiel liked to say, we can’t forecast the news. This is not strictly accurate. We can forecast the news, at least the regularly scheduled news, at least some of the time and within a forecast range. This is the sense in which price changes based on news are not random.

But he’s right that what we can’t forecast is Shocks.

The list of potential Shocks is staggering.

First among them would be a new oil supply problem, and especially if it’s associated with a big “geo-political” situation like Iran. If Israel were to start something (or respond robustly to something), oil would zoom back up to $150 and beyond, probably $200. This is why oil price forecasts are so iffy, not to mention that nobody knows how to measure the true breaking point of the speculators (at which they run for the exit).

Another shock could be a terrorist event, or a regional bank failure of some size in the US or Europe, or a political assassination, or a big country officially announcing reserve diversification out of the dollar, and so on.

We need to be especially vigilant these days.

The dollar rally is tiptoeing on thin ice.

There be monsters below.

Bye for Now

Barbara Rockefeller

we remain puzzled by the Pound

Foreign Currency Exchange Outlook : We get a number of releases today but the focus will be on only one, the Case-Shiller home price index for May, probably a drop by 16% y/y. It was 15.3% in May, hence an acceleration. The Bloomberg survey of 25 economists yields a forecast range of -14.8% to -17%. The index has fallen continuously since Jan 2007. The Bloomberg story notes that the National Association of Realtors said last week that the median price of existing home sales fell 6.1% y/y in June (after 8.5% in April). The discrepancy is explained by different survey coverage and methods.

Oh, really?

The Conference Board consumer confidence index, an hour later at 10 am, will probably drop to 50.1 from 50.4 inJune, says Bloomberg, the lowest since February 1992.

Yesterday the IMF report said the bottom is not yet in sight for US housing. The direct implication is that the bottom is not in sight for defaults and foreclosures, either, even in prime assets, and with credit quality declining in credit card and other bundled securities, banks must continue to shrink their balance sheets. We could even get a nasty shock in the form of additional regional banks failures, although over the weekend at least one bank failed (in Nevada) and it didn’t make the national headlines.

We had a relatively bad day in the financial markets yesterday (oil up, stocks down) but the US Dollar was not sold off. This suggests the market is willing to accept bad news as normal in the US while still feeling shocked by equivalent bad news in the UK and Europe. The US Dollar Japanese Yen exchange rate bottomed last night at 107.26 and has risen steadily to 107.88 so far—will it ever break 108? Judging from bad data in Japan today, the probability is getting higher.

However, we remain puzzled by the Pound. Yes, it fell this morning on the bad mortgage and retail sales news (from 1.9945 near the US close yesterday to 1.9860 this morning) but this is not a big move and it may already be over, having found support at a hand-drawn support line at 1.9860 and starting to rise off it at 8:15 am ET.

The point is probably that the focus is not entirely on the US dollar anymore. Foreign Exchange Traders are willing to consider bad conditions elsewhere. Pressure from the financial sector and economic data keeps the US Dollar Exchange Rates on the defensive, but the absence of favorable data from other countries, including the eurozone, makes the pressure not too hot.

We await a breakout on something, probably GDP in Thursday or payrolls on Friday.

It could be a boring sideways grind until then.

Bye For Now

Barbara Rockefeller

Buy Euro Dollars

Foreign Exchange Currency Outlook : The Senate passed the bill on Saturday that bails out Freddie and Fannie and offers initiatives to fix some small part of the mortgage crisis. The White House press office says it is likely that Bush will sign the bill (probably Wednesday). We already know the general dimensions of the bill so it won’t be news, but it’s still one stop closer to making the “implicit” government guarantee an explicit one, and the bond gang likes it. Names like Pimco’s Gross are happy to say they will buy the GSE paper, especially since it yields some 78 bp over equivalent paper from the government. We fail to understand the bond market, as usual. Why would the yield not fall to the same as the government paper now that the guarantee is more explicit? Market News reported Friday that agency debt spreads will tighten this week once the legislation is wrapped up, so perhaps patience is called for.

Probably the important thing to take away from the new legislation is not its content, but rather that action in the US has been blazingly fast compared to previous crises and certainly compared to comparable action in other countries (think of how long it took Japan to deal with its banking crisis). Within a year of the crisis emerging, we have dealt with a failing investment bank (Bear Stearns), a stimulus package, a GSE bailout, a limit on short-selling, and a handful of other initiatives. This is one time when the relative flexibility of adaptability of the US is on display. We may not approve of every aspect of it, but we must admit it has been speedy in the grand scheme of things. We may also not get a recovery bounce out of it, but a recovery bounce is at least a possibility.

We get a lot of data this week, including tomorrow’s Case/Shiller home price index for May. Well, we know it will be bad. So far, house prices have fallen some 16% and the ultimate ending point will probably be a drop of 25-30%, so we could be more than halfway there. Also tomorrow is the Conference

Board consumer sentiment, following the University of Michigan on Friday.

Wednesday is the ADP Macro estimate of private sector payrolls ahead of Friday’s release, which is the real biggie of the week. We have to talk about it all week, alas. So far the survey numbers are coming in around –50,000-75,000.

Thursday gives “advance” GDP for the second quarter. Because of stimulus checks and other one-time things, it could be very high, even 2.6%, according to Lynne at www.wallstreetinadvance.com. Even a reading of 2% is still decidedly not “recession” and let’s remember that Europe has been busily revising growth numbers for the year sharply downward. Bloomberg pours cold water on a single good quarter, saying its survey of 60+ economists yields a forecast of 1.5% for the calendar year, from 2.2% in 2007 (with inflation at 4.1%).

Lynne points out that other news on Friday may be good, too. June construction spending could get lifted by the change in New York regs that inspired pent-up starts. Also, the ISM manufacturing index “could see a bump on settlement of the American Axle strike, which rippled through many industries.”

We can easily build a US dollar rally on good data all week, which will include corporate earnings by the bucketload, as long as there are no unpleasant surprises and especially if oil continues downward or at least tame. Some bad news elsewhere would help the dollar, too, now that traders are willing to give some weight to bad data from anywhere other than the US instead of brushing it off. Keep in mind the condition—that oil continues downward or at least tame. Oil is everything. We could have splendid data, talk of recovery, bad data elsewhere, and a favorable shocks but it will go mean nothing if oil breaks to the upside again.

Still, having given all those warnings, it looks like the US Dollar is growing legs. We see it in the form of a new signal to buy US Dollar against the Swiss franc, even if it’s not confirmed by similar signals in the Buy Euro Dollars.

Obama speech yesterday in Berlin was wonderful.

Political Tidbit: The Obama speech yesterday in Berlin was wonderful. First, the man can speak, unlike the guy we’ve got now.

He voiced American idealism, something we haven’t heard for a while

instead of getting the second-rate but still nasty Kissinger-esque Realpolitick of the current administration. Second, the crowd was applauding everything Obama said and waving American flags (instead of “Yankee, Go Home” banners). When was the last time we saw that? They threw tomatoes at Nixon in Venezuela and today’s banners for Bush are unprintable in a family newsletter.

Third, some 200,000 people attended, a very large crowd to listen to a foreign politician in any city. Fourth, the speech incorporated references to the American involvement with Berlin, from the 1948-49 Berlin airlift, to Kennedy’s “Ich bin ein Berliner” in the early 1960’s, to Reagan’s “Mr. Gorbechev, tear down this wall!,” to the Berliners actually tearing the thing down in 1989, as the rest of world watched on television with tears streaming down their faces. If you are going abroad to make a speech during a US presidential election, you can’t beat Berlin for a venue.

The Euro stopped falling

Technical Currency Notes:

The Euro stopped falling at 1.5625 around noon yesterday, close to the most recent low from July 7 at 1.5608 but no cigar. A price has to make a lower low to get a “trend,” and euro bulls (presumably) defended the level. Predictably, failure to penetrate the old low aroused the FX trader instinct of “If you can sell it, buy it.” The Euro has now moved up over 100 points from yesterday’s low.

We suspected a bounce but 100+ points is quite a lot for less a day. It can get to 1.5825 or even 1.5875 before we can say the dip failed to turn into a reversal. In other words, we are getting a correction within a correction.

Got that?

The picture is not the same across all currencies. The Pound Sterling seems to be rising for its own reasons independent of sentiment in Euro vs US Dollars. The US Dollars still has plenty of promise against the Japanese Yen, where the downchannel may be decisively broken. Against the Canadian Dollar, the US dollar is at a key resistance level with rising momentum—no correction there, at least not yet.

Bye For Now

Barbara Rockefeller

We are not going to rush into dumping US Dollars just yet

Foreign Currency Exchange Outlook

Today we get durables goods and new home sales, both probably on the bad/low side, but let’s save time and be realistic—the fate of the US Dollar today depends on calm returning to the financial sector (equities rising, bond prices falling) and on the price of oil. For what it’s worth, new homes sales are expected to drop to a rate of 504,000 in June after dipping to 512,000 in May, and durables are forecast to fall 0.5% in June after being steady in May.

As we noted yesterday, the housing sector hasn’t bottomed yet and on that basis, it was premature for the US dollar to be rising. The Foreign Exchange market trades on expectations and quickly puts bad news behind it—perhaps too quickly. We had three Fed officials talking the hawkish talk, but that doesn’t mean the Fed itself feels it has the latitude to walk the hawkish walk. Revived hopes of a rate hike this fall were not realistic. Every single thing would have to line up to get that outcome, and how often does that happen?

Even if yesterday’s US Dollar selling was an overreaction to events in other markets, we can’t call an end to it. Dollar selling gets to be a habit. We would guess that the day ends badly for the dollar but the week will see a net gain. This is going to cause fingernail-chewing Sunday night. Which to choose—the potentially recovering US Dollar or the same-old, same-old bet the ranch against it? We are somewhat inclined to like the idea of a more enduring dollar rally. After all, we will be getting a very big new housing market rescue bill any day now, plus oil could stabilize near lower levels around $120-125, which is very dollar-friendly. The market just swallowed a ton of US government paper without demanding higher yields. And perhaps the worst of the housing crisis really is behind us, not to mention the financial market disclosure.

It’s possible the NAB write-down is not the canary in the coal mine, but rather the last hurrah.

We are not going to rush into dumping US Dollars just yet.

Bye for now!

Barbara Rockefeller

Record High Euro vs Us Dollars only a week ago - Read that again!

Foreign Currency Exchange Outlook : Today we get, in addition to the usual unemployment claims, existing home sales. We already know it will be bad and that is priced in, right? Just as traders are starting to feel that pessimism was overdone about the US financial system and the high price of oil, maybe housing will come back to bite us on the rear end. After all, the housing and mortgage data is pretty bad. The first rumblings of rate hike talk could be just smoke. Realistically, the US Fed can’t hike rates until the housing bottom is in. How will we know the bottom is in? Well, it’s not in as long as delinquencies and foreclosures are still rising. The housing bubble hasn't finished bursting and we might consider it the “first cause” of the current problems from which all else flows.

It’s interesting that the Foreign Exchange Market spends almost no time on the housing crisis. It has mostly priced it in and moved on. It’s conventional wisdom that the stock market “leads” the economy but we wonder if it might be the US Dollar, instead. If so, then “moving on” may have been premature and the US dollar is due for an unhappy shock.

Existing home sales (due at 10 am ET) are forecast to fall by 1% to an annual rate of 4.940 million units in June, down from a rate of 4.990 million units in May. May was an oddball piece of data, the second rise in a 10-month slide. The number of unsold homes remains near all-time highs. The Office of Federal Housing Enterprise reported earlier this week that home prices fell by a record 4.8% y/y in May, with some analysts still forecasting another 15-25% to go. Will the Fannie/Freddie rescue change that? Probably not, although it may help marginally, with some 400,000 distressed homeowners targeted in the bill. But Foreign Exchange Traders are prone to take the attitude “don’t bother me with the facts.”

It’s nice and may suffice that oil is falling, the Fannie/Freddie bill gets passed, financial stocks are okay, and US yields are rising. On the technical analysis side, the US Dollar has recovered more than 50% of the move from the May-July euro move up to the record high only a week ago.

Read that again—we had the record high Euro vs Us Dollars only a week ago.

This is an exceptionally speedy correction and we have to be careful to keep calling it a correction until we feel more confident it’s a true trend reversal. It’s not a reversal until additional conditions are met, including a lower low than the last intermediate low (1.5612) and before that, 1.5303.

The euro has to go all the way past the May low of 1.5284 to call it a trend reversal.

From a trader’s perspective, this is silly. We wouldnt want to lose the opportunity to make gains on another 400 points. But in the Big Picture, for position traders, it’s the only conservative way to look at it. If Foreign Exchange Traders fall out of love with the US Dollar —and they are fickle—because oil zooms up or some other reason, watch out.

We always get a correction after a new historic high and they can end very fast.

Bye For Now

Barbara Rockefeller

falling oil prices and the newest technical charts in Foreign Exchange

Foreign Currency Exchange Outlook: Keep in mind the phrase “What have you done for me lately?” The US Dollar got lucky yesterday. The GSEs are going to be saved (not new news). The stock market accepted regional banks losses (stock markets are always foolish).

The US Treasury Secretary spoke in support of a strong dollar (golly).

The only thing real behind the dollar rally is the price of oil falling so dramatically.

We need more of the same in oil and also for upcoming housing data tomorrow and Friday to be as expected. We have to assume that bad numbers are already priced in, so better-than-expected numbers could potentially be US Dollar friendly. We also get the Beige Book today, which could be salted and peppered with bad adjectives, but the Beige Book seldom moves the Foreign Exchange Market one way or the other. We also get the usual Wednesday Energy Dept inventory report today, probably again showing a drop in demand in the US.

In sum, The US Dollar has only two things going for it—falling oil prices and the newest technical charts in Foreign Exchange. These are not exactly a sound basis for a continuation rally—we’d really rather have some fundamentals, too. But a breakout on the chart is nice, and may suffice, subject to the caveat that oil must continue to fall or at least stabilize around $120-125.

Bye For Now

Barbara Rockefeller

price of oil would fall like a rock.

Foreign Currency Exchange Outlook: As noted yesterday, it takes a steady stream of decent US data to keep the US Dollar defended, but really bad news from elsewhere can help, too. On Thursday we get the IFO report on business sentiment from Germany, always an influential number, plus the flash estimate of manufacturing PMI. We get Euro Zone industrial orders and eurozone PMI, too, and in the UK, consumer confidence, retail sales, and BoE minutes.

We might call it “dueling data”—who has the gloomier outlook? We say it doesn’t matter. As we saw with horrendously bad news from the UK yesterday (the government predicting “years” of slowdown), Currencies don’t always respond the way they “should.” Pounds Sterling didn’t fall on the news, and even ended the US day back over its own round number, 2.0000.

If the IFO index comes in down to 100.1 from 101.3 in June, as the Bloomberg survey suggests, so what? The euro may take a dip but nobody really thinks the ECB makes monetary policy on the IFO index. The ECB claims to have no bias but everyone thinks it secretly has a bias to tightening, even if the forecast has been shifted out from the fall to January. In the absence of a parallel tightening intention in the UK and US (or Japan), how can the euro not proceed higher against all three currencies? Yesterday Euros vs Japanense Yen made a new lifetime high of 169.92, close to the round number 170. The crosses often get the action when Foreign Exchange Traders are a bit confused about the US Dollar outright, but this never lasts for long. Last Tuesday we had a new lifetime high of 160.40 in Euros to US Dollar. We have almost no hope of that level failing to get reached again, if not this week, then sometime this summer.

We continue to think that if by some miracle oil were to slip down to $1.20 and stay there, the dollar has a fighting chance. What can make oil fall? Well, falling prices engender more decline as “investors” perceive excessive risk. Many of these investor really are investors and not speculators, meaning they are accustomed to less volatile outcomes (and less leverage). What changes the outlook for the supply demand picture?

One thing might be a true drop in perceived future demand from the US if the US were to embrace alternative energy in a big way. T. Boone Pickens is heavily advertising his wind power ideas. While a majority of polled Americans favor offshore drilling, a majority also favors environmental protection and alternative energy—the survey results depend entirely on how you ask the question.

Let’s say we get some political leadership on this. It certainly won’t come from the oil company-addled Republicans, so it would have to be Obama. We don’t know if he would do it, but let’s say he does create a new department on alternative energy and puts somebody really good in the top job, like Schwarzenegger (who volunteered). Boy, the price of oil would fall like a rock. This is the sense in which Obama is seen as potentially very favorable for the US Dollar, contrary to the big government/excessive spending picture that the opposition generally paints of the Democratic party. Everyone likes the fiscal rectitude posture of the Republicans, their business-friendly stance and their supposed foreign policy toughness, but remember, oil is everything. If Obama embraces alternative energy and that causes the price of oil to fall, it’s a win-win. Trouble is, we don’t actually know much about what Obama stands for.

Wishful thinking? Alas, yes. But it’s been a long time since Americans had wishes.

As the election cycle proceeds in the US, we will find that it plays an ever larger role in currency markets. Meanwhile, we have to watch the stock market, which leads sentiment and to a certain extent, the economy. If we are going to get a small bank failure, we could be starting to find out about it this week. Today Paulson speaks, presumably in support of his plan for rescuing Fannie and Freddie, but that’s already old news. It’s possible that last night’s US Dollar rout really will fizzle, as seems likely this morning. But stay tuned.

Soon the little stuff will morph into Big Picture stuff.

Bye For Now

Barbara Rockefeller

CFTC Commitment of Traders Report

CFTC Commitment of Traders Report: On Friday the CFTC reported that as of the previous Tuesday, speculators had pared net euro long positions to a measly 23,049 contracts (from 24,007 the week before). Market News notes that “this compares to the April 29 net euro short of 21,315 contracts, which was the first speculative net euro short position since December 2005. The new net long euro positions remains in sharp contrast to the net euro long position of +119,538 contracts, seen May 15, 2007 which was a record euro long.”

Meanwhile, in the yen, speculators went more long to 50,105 contracts from 5,325 contracts the
week before. “This compares to the net long position of 16,005 contracts seen July 1 and the net short of 12,747 contracts seen June 24. Last Tuesday's position remains in contrast to the March 25 position of 65,920 contracts, which was a record net long yen position and June 26, 2007's net yen short of 188,077 contracts, which was a record short.”

US dollar to hang on to gains

Foreign Currency Exchange Outlook; Not to rain on everybody’s parade, but the stars have to line up exactly right this week for the US dollar to hang on to gains. First, oil has to stay low and appear to be going lower, whether we consider it a correction or a true change in sentiment. This means that any hurricanes nearing the Gulf have to veer away. Don’t you hate it when financial outcomes depend on the weather?

Second, regional banks have to be seen as not on the brink of failure. If we get another bank failure like IndyMac, it has to be some small outfit that nobody much cares about—it can’t be one of the big “regionals” like Wachovia.

Third, the economic agenda has to continue to bring no nasty surprises. This morning (10 am) we get the Conference Board leading indicators, probably a drop by 0.1pc in June, according to the Bloomberg survey. The forecast range is –0.4% to +0.3%. Bloomberg points out that 7 of 10 indicators are already known, stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours. The Conference Board estimates the remaining three: new orders for consumer groups, bookings for capital equipment and the money supply. This means the number is probably already priced in and may not have much influence on any market.

Tomorrow it’s the OFHEO May house price index and on Thursday, June existing homes sales. Friday has June new home sales. We know they are going to be bad, don’t we? Friday brings June durables, which might be good because we know autos were up. Also Friday is the usual University of Michigan July consumer sentiment index (final).

Stock market guru Sandi Lynne says the biggie will be Wednesday’s Beige Book, which will be the last ahead of the August 5 FOMC. “If the word ‘deterioration’ crops up frequently in the Beige, it’ll compete with price pressures, in all likelihood.” But still, we get speeches from Philadelphia Fed Pres Plosser, already known to be a hawk, following Minneapolis Pres Stern last week, also a hawk. Nobody expects the Fed to hike on Aug 5 but a little dissent would go a long way to suppress outrage that the Fed has abandoned price stability to help the Wall Street oligarchy instead.

It’s a rotten thing to say, but the US dollar’s firmness this week relies to a certain extent on news from elsewhere being worse than in the US.

This is especially evident in the UK and sterling, whereas we get the opposite effect in Germany and thus probably the euro. The implication is that when Foreign Exchange Traders are uncertain about the US Dollar outright, they head for the crosses. Let’s say sterling does take off to the downside—it may do worse against the euro and yen than the dollar, but if the euro and yen rise against the pound, they may also rise against the dollar.

We deduce that this is going to be a bad week, choppy in a narrow range and lack of clarity on exactly where sentiment lies.

Bye for Now

Barbara Rockefeller

Current Currency Technical Analysis Positions

SPOT CURRENT SIGNAL OPEN OPEN POSITION
POSITION STRENGTH DATE RATE GAIN/LOSS
106.32 LONG YEN WEAK 07/16/08 104.09 -2.10%
1.9937 LONG POUND WEAK 06/26/08 1.979 0.74%
1.5861 LONG EURO WEAK 06/26/08 1.5681 1.15%
168.66 LONG EURO STRONG 04/03/08 160 5.41%
0.7955 LONG EURO WEAK 07/09/08 0.796 -0.06%
212.06 LONG POUND WEAK 05/05/08 207.71 2.09%
1.0203 LONG CHF WEAK 06/26/08 1.0023 -1.76%
1.0068 LONG CAD WEAK 07/15/08 1.0002 -0.66%
0.9721 LONG Aussie WEAK 06/24/08 0.9544 1.85%
10.224 LONG PESO STRONG 01/31/08 10.84 6.03%

We should all be scared half to death that the US Dollar is rising

Foreign Currency Exchange Outlook: As they used to say in the Clinton Administration, It’s the economy, stupid. Now we have to say, It’s oil, stupid. While it’s nice to have a stock market rally and even nicer for bond yields to be rising, these are frothy things. What’s real is oil, and oil is having the most reliable relationship with The US Dollar that we have seen in recent years among any two asset classes.

We should all be scared half to death that the rising US Dollar, or at least the US Dollar not falling through to the basement, is built on something we fail to understand, the workings of the oil market. Analysts can offer plenty of reasons for oil to be retreating, but most of the reasons have nothing to do with actual supply and demand, including the airy-fairy idea that the US will resume drilling on the Continental shelf (over Al Gores’ dead body). Therefore, while we are perfectly willing to entertain the idea of an ongoing dollar rally based on a temporary drop in the price of oil, we don’t trust it one inch, and you shouldn’t, either.

All we can forecast for sure in the coming days is continuing volatility. Options traders must be ecstatic. The rest of us should be very, very cautious. At a guess, many Currency Traders are hunting for a US Dollar high to sell it for a longer-lasting slide. That means we should be looking for good places to buy things we think we have a grip on, which unfortunately number only two today—the CAD and AUD. Late today, picking positions for Sunday night is going to be just awful unless something happens today.

As long as oil slides downward, we have to accept a stronger dollar—but it’s on a flimsy basis that can disappear in a flash. Oh, dear.

Bye for Now

Barbara Rockefeller

Everyone admits that the US Fed is in a pickle

Foreign Currency Exchange Outlook: The balanced outlook in the most recent Fed policy meeting minutes has been overridden by events since the meeting. While Bernanke’s speech yesterday was largely ignored by all the markets, which were beguiled instead of falling oil and rising stocks, nobody missed the implication of his remarks—-that the Fed is on hold for a very long time. All the major bank economists are busily re-writing their forecasts. Market News picks up one that is chilling—HSBC cut its second-half GDP forecast to under 1% and sees “a 45pc probability of a 50 bp Fed interest rate cut to 1.50%."

Well, 45pc is not over 50pc, but the mere mention of a cut is terrifying. We imagine that scenario is realistic only if we actually do get additional bank failures.

Remember, banks have disclosed about 420 billion US Dollars in housing-related losses, while some experts, including the IMF, put the estimate at 1 trillion US Dollars or more. Several important figures have said the worst is over but that doesn’t mean all the bad news is out. If fresh bad news is over-weighted, the crisis is not over and could take some strange turns.

Everyone admits that the Fed is in a pickle.

We have rising inflation and it’s becoming obvious that higher fuel and food prices are starting to spill over to core inflation. Normally the Fed would be waving its arms and talking about upside risks. While Bernanke did talk about upside risks, he is also talking about downside risks to growth from the contracting housing and banking sectors, and still fighting off whatever potential bank failures might be lurking in the bushes. No central bank wants to be seen hiking interest rates just as some banks are failing—it makes them look stupid and insensitive.

We get stupid and insensitive from elected officials and expect better of the US Fed.

If oil prices continue to correct today, we agree that the US dollar can regain some strength, perhaps to 1.5745 or so, which is the bottom of the channel drawn off the June euro low. But only if the euro falls under the June 7 low of 1.5608 can we start to buy into a real US Dollar rally. In addition to falling oil, that would take good bank earnings this week, a serious exit by shorts when the new rules come in next week, ongoing stock market gains, a rise in US Treasury yields, and calm acceptance of the Freddie/Fannie rescue.

Oh, and data can’t be too bad, either, and talks with Iran need to be promising this weekend.

It’s a lot to hope for.

Bye for Now

Barbara Rockefeller

But distrust about the US financial scene is just starting.

Foreign Exchange Currency Outlook: At 8:30 am today we get CPI, probably a rise by 0.7% in June after 0.6% in May or 4.5% y/y, the most since Sept 2005. The range of forecasts is a wide 0.2-1.1% for the monthly version. Core probably rose a lot less, 0.2%. Today we also get industrial production (probably a small rise) and the TICS report on capital flows.

Yesterday, June wholesale prices rose 1.8%, or 9,2% y/y, the biggest one-year gain since 1981. Wholesale prices do not feed consumer prices in the US as directly as in Europe, but it’s clear that we have what is called pipeline inflation pressure.

Higher inflation and slowing growth in the context of financial market “stress,” as Bernanke put it, is just about the worst-case scenario. The only thing worse would be widespread regional bank failures with big banks lacking the capital to take them over.

Some analysts, such as the chief currency strategist at BoA, think that when all the bad news is already priced in to the dollar, we have to expect a relief rally, and probably a lasting one. This point of view has it that, as Market News reports, “the time has come to position for a gradual euro decline in the years ahead… recommending a euro selling around $1.5920, with a stop on a two-day close over $1.6250, and an eventual return to the Jan 22 low near $1.4365.”

Others say the euro “topping out process” could last 6 months or more. We have no evidence the new euro high yesterday was a head-fake. We probably have a range of 1.6175-$1.6200 or 1.6250-75, with euro support on the downside around $1.5710-25.

Currency Traders are not looking so much at individual data points or even broad general statements from officials as trying to puzzle out the relationships among oil and the dollar, financial markets and capital markets, and growth and inflation—Big Picture relationships. It’s silly to say slowdown in the US (and Europe) “should” cause oil prices to fall if real demand from emerging markets is going to overwhelm small declines—and this has been the consensus so far. In other words, there is virtually nothing the US can do to re-balance supply and demand in energy markets, at least in the short run.

Therefore, the drop in oil prices yesterday was based on little or nothing to do with fundamentals and everything to do with speculators re-arranging their positions. Economists say this is a one-time anomaly so it would be really, really interesting to see a further rout in oil that has a more lasting effect. We don’t predict it, but it’s certainly not out of the question. That would make all the economists reconsider their attitude toward supply and demand. Demand doesn’t have to be “real” for it to influence prices. We have accepted that inflation expectations influence real inflation—-so why not accept that speculative demand influences overall demand the same way?

On the horizon are two big developments—oil prices continuing upward (or not), and the US regional banks. As we start getting earnings reports from financial institutions today through Friday, the outlook for the regionals will be clearer. We expect a few failures. We suspect the Fed and Treasury know which ones, too. Unless oil were to continue to fall in a meaningful way (clearly trended), we think the ongoing financial market turmoil is going to be US dollar-negative. This will not come from Freddie and Fannie, which were rescued. That story is over.

But distrust about the US financial scene is just starting.

It’s not severe yet.

It will become severe.

We will see runs on banks as we saw with IndyMac.

This may be foolish since just about everybody’s deposits are insured and safe, as Bush was careful to point out yesterday, but panic knows no sensibility.

Rockefeller Foreign Exchange Currency Outlook

Foreign Exchange Currency Outlook : We PPI today plus the TICS report (foreign capital flows), but the big Event is Bernanke’s testimony to the House Financial Services Committee, which has added US Treasury Sec Paulson and SEC chief Cox to the witness list. We will all be glued to the TV at 10 am, and tone matters as much as content. Bernanke is sure to address the dangers to growth of the current financial sector turmoil and Congress is sure to ask how many regional banks are going to go under (an unanswerable question). Attention on whether and how to fix the financial sector will dominate the session today, with the Congressmen spending more time speaking than listening, but the point will be made that attention to inflation is out the window, overshadowed by events. Poor Bernanke—he almost certainly wants to be a courageous and stalwart as Volcker in taming inflation, but institutional events keep getting in the way. As Bloomberg notes, talk of a Fed Interest Rate Hike as early as August is now silenced, and Fed fund futures traders see the chance of a move by year-end dropping to 67pc from 100pc only a month ago.

As an expert on the Great Depression, Bernanke knows perfectly well that prematurely raising interest rates while the financial sector is in a shake-out was a big mistake then and would be a big mistake then. Paulson and others are careful to say that all the lending to banks and near-banks is sterilized and thus does not raise money supply and contribute to inflation, but that doesn’t seem to stop critics who say the central bank is overly focused on the threat to growth and neglecting the threat of inflation. Aside from exports, there is not a single good thing in the US economy to point to. Unless conditions worsen elsewhere by more—as perhaps foreshadowed by the failure of the Spanish Real Estate company— the US Dollar is toast.

Second thoughts yesterday afternoon that stabilized the US Dollar are now out the window. Panic US Dollar Selling is far more fun, and more profitable, too. Reuters reports that this morning in London, US stock index futures were down 1.2 to 1.4 percent, foretelling a really bad day on Wall street and that’s before we even get earnings reports from big names like Merrill Lynch, Morgan Stanley and Citigroup. The correlation of stock indices with currencies is a shaky one except when there is a sense of crisis in the air, when the correlation becomes very tight.

A key point to keep in mind is that US government and government-related paper is okay. The success of the Freddie short term paper issue yesterday and falling price of the GSE credit default swaps attests to that. We can expect foreign central banks and many private investors (like pension funds) to continue to enjoy the full faith and credit of the sovereign.

That means no big US Dollar sales from that direction, which really would be the Armegeddon of all crises. Eventually, if total US government debt rises because of the bailouts, the US Dollar gets a negative effect from that. But that’s later we haven’t counted that cost yet. But it’s the private sector, from regional banks to consumer stocks, at great risk of falling really far into bear territory. You don’t need a sovereign problem to get a falling US Dollar on that alone, especially since oil and gold are likely to zoom up, too. As usual, markets overshoot. We wrote of the desirability of seeing vultures last week and that was premature. But hang on, they will come. In the meanwhile, strap on your parachute.

We're not far off the capitulation point for the euro

Outlook: The third week of every month is the busy data week and always a tough row to hoe for those trying to put it in summary form and analyze it. This week it’s especially burdensome because we have earnings reports, too, something most Foreign Exchange Traders don’t have to spend much time on.

According to Wall Street guru Sandi Lynne (www.wallstreetinadvance.com), we get earnings from Wells Fargo on Wednesday and then a flood on Thursday--KKR Financial, JPMorgan, MGIC Investment, Bank of New York Mellon, CIT Financial, Comerica, PNC Financial, Capital One, Merrill Lynch, and Zion’s Bank, all before Citigroup reports Friday morning. Lynne notes that all week, in Boston, something will be held named the Annual Corporate Fraud Conference. In addition to the financials, also reporting are a slew of companies, including IBM, Microsoft, Google, eBay, Advanced Micro Devices, Coca Cola, Harley Davidson, and Mattel, to name just a few. Friday is options expiration day.

The economic releases are June PPI and retail sales on Tuesday, with CPI, industrial production and the May Treasury capital flow report on Wednesday. Also Wednesday is the National Association of Home Builder’s July Housing Market Index. Thursday brings June housing starts and building permits and the Philadelphia Fed July survey.

Institutional information usually trumps data and tomorrow we get Bernanke testifying before the House and then the next day to the Senate. The goal of the testimony is to offer the Fed’s economic forecasts and at least some of the underpinnings of how the Fed thinks about monetary policy going forward, but we imagine a great deal of time will be spent on trying to measure how much wasted time is going to be spent on the financial crisis.

We have almost no doubt that the Fed and the Treasury will succeed in tamping down hysteria over the potential failure of Fannie and Freddie. They are literally too big to fail—having underwritten one way or another over $5 trillion in home loans. It may turn out that they hold or sold more bad paper than we now suspect, but never mind—too big to fail means precisely that. Eventually panic will subside, perhaps as early as this week, but then we move on to the next thing—more regional bank failures like IndyMac. It seems likely that the Fed and Treasury will be preoccupied with these matters for a long time to come and talk of rate changes will get back-burnered to after year-end, as several forecasters have predicted.

The good news about the Fannie and Freddie debacle is that now it’s out in the open, having festered under a cover of hot air and misdirection for at least 20 years. Can Europe say the same? Nobody knows the quality of the paper used as collateral at the ECB. As we saw from various German bank failures over the years, Europeans may have higher credit standards and less fraud than the US, but their bankers are no more competent and sometimes a lot less competent than their US counterparts. On a one-to-one comparison, it’s not clear that the US financial system is more fragile or risky than Europe’s.

And when the mess does get cleaned up, US growth is almost certain to be earlier-appearing and more sprightly than in inflexible old Europe. Labor is the pivot point. In the US you can hire and fire someone without a problem, whereas in Europe to fire someone requires acres of paperwork. It’s that simple. Most analysts perceive that European recovery will lag US recovery when it does come, and that should be dollar-friendly. As UBS wrote last week, we may get another hike from the ECB but then it is expected to be cutting in 2009 to boost activity—at the same time that the US could already be on the recovery path. Bloomberg writes that “The ECB will cut the key rate a quarter-percentage point to 4 percent by the end of June 2009, according to the median of 30 economists in a Bloomberg survey.”

Out of such perception may come a dollar rally scenario. This seems to be the view of currency analysts at Bank of America, Morgan Stanley, BNP Paribas, and surprise! Bill Gross at Pimco, not a perennial dollar bear, after all. London forecaster Calyon says “We're not far off the capitulation point for the euro.”

This is almost certainly premature, and the relief rally of the dollar may not have much lasting power if data continues to come in bad this week. A lot depends on Bernanke’s tone tomorrow. If he sounds sacred, everyone else will get scared, too. And there is, of course, a very large fly in the ointment—commodity prices in general and oil in particular. No matter how much reassurance is issued and believed about the ultimate fate of the financial sector, oil looms over everything. Higher oil prices—and $150 is within smelling distance—is not US Dollar friendly. In short, we are not ready and willing to buy into a US Dollar rally scenario just yet.

Outlook - Foreign Exchange Traders Buying Euros

We get the University of Michigan preliminary index of consumer sentiment this morning, probably a drop to a 28-year low of 55.5 in July from 56.4 in June, according to the Bloomberg survey. Well, if a bad number is expected and priced in, we may get no reaction on the actual release—and if it’s a better number, maybe even a small relief rally. Anyone who is surprised by grim consumer confidence hasn’t been paying attention. Today we also get the trade deficit for May, probably a widening to $62.7 billion from $60.9 billion seen in April on higher energy prices.

Next week we will get some bad news from Europe (industrial production, ZEW) and it remains to be seen whether it has been priced in. On the whole we are unaccustomed to bad economic news from Europe so it tends not to be priced in. In addition, panic and hysteria over conditions in the US (Lehman, Freddie and Fannie, gas prices, etc.) may settle down after a calming summer weekend without massive thunderstorms for once. (Somebody somewhere has done a correlation study on the amount of electricity in the air from lightning storms to moves in the S&P…).

All of this adds up to a potential US Dollar rebound next week. Foreign Exchange Traders can’t hang on to high levels of adrenaline for long periods—it’s just too tiring. And there are plenty of coins lying around on the street to pick up. Pimco is picking up shares of Freddie and Fannie, as noted above. GE had no trouble finding a buyer for its household appliance unit and now its Japanese consumer finance unit. Citibank is selling its German retail business. Europeans are buying a big US beer company, and the NY Times carried a fascinating table on US real estate purchases by foreigners, mostly the Middle East but followed closely by Germans. The Germans are so at-home with US real estate that they just sold the Chrysler building.

You know the bottom is in sight when bargain-hunters come out of their lairs. Some bargain-hunters are too early and get their hands chopped off, like Citgo’s $1 billion buy-in to Bear Stearns, but never mind—vultures are useful birds (and quite beautiful in flight). We can’t say if perception of bargain-hunting will start helping the Buying US Dollars, and certainly not that it will help as early as next week, but let’s learn a lesson from history—in the 1990’s, the US dollar recovery was accompanied by a big rise in foreign direct investment. A lot of FDI has been diverted to China and India in recent years, hence all the wailing and gnashing of teeth over hot money, but let’s face it, money is simply safer in the US than in emerging markets, and when the rate of return looks on a par with Chinese returns, the US can be very competitive in that race.

Realistically, though, not many are looking at the Big Picture, at least not yet, and next week we get a ton of potentially bad data on everything from inflation (both PPI and CPI), housing starts, the capital flow report from the Treasury, and the earnings reports of major financial institutions. Bad numbers on any or all of these fronts will feed the dollar downtrend.
We are a little surprised that sentiment toward the dollar seems to hinge to a certain extent on the fate of Freddie and Fannie. All the commentary from Asia, and especially Japan, mentions the potential government bail-out. Evidently these traders want the US government to state unambiguously that Freddie and Fannie are too big to fail and of course they will be “guaranteed” as well as “sponsored.” We say experience teaches us that the US government, having made a hash out of Freddie and Fannie for so many years, is hardly likely to act swiftly and decisively now. Paulson and Bernanke have the moxie to step in, though, so there is some small hope on this matter. The betting is that next week Freddie and Fannie get rescued one way or the other, without trashing their private stock issuer status, while Lehman may fail and the Bernanke-Paulson team will let Lehman fail.

From a political philosophy point of view, it’s hard to know where Bush and his advisors will stand on Freddie and Fannie—and make no mistake, the resolution is a deeply political one. The Bushies no doubt like the idea of a government agency having a double identity as a private firm with its own stock listing. They don’t like government being in business—too pinko. But they may be willing to throw them under the bus, the cliché of the moment, to prove that government doesn’t belong in business and always does make a hash of it. We say that to abandon businesses worth over $5 trillion to make a political point is the eight of folly, but consider these quality of the people we are talking about. In the end, we imagine Paulson earnestly trying to convince the Bushies that failure is failure and that’s what will be remembered, along with Iraq, gas prices and the trashed dollar, not the political principle. The Bushies could argue that this is their Reagan moment, likening the crash of Freddie and Fannie to Reagan’s destruction of the air traffic controllers union.

We like to bet on common sense prevailing and Congress being unwilling to let Bush have his way with something as important as Freddie and Fannie. It could pass emergency legislation authorizing a rise in the public debt to save them. That has its own fallout, of course. Either way, we won’t get a resolution today or probably even next week, and the dollar is likely to remain under pressure as a result. The Freddie/Fannie story is a lose-lose situation for the dollar. We also do not expect Israel to attack Iran, but that doesn’t mean the price of oil will fall back as cool heads prevail, assuming they do.

How severe will the pressure get? Pretty darn severe. We can easily see Foreign Exchange Traders Buying Euros over 1.60 and the yen under 105. Next week.

Bye for Now

Barbara Rockefeller

Outlook for Euro to US Dollar Exchange Rate

Currency Outlook: What Bernanke and Paulson say today to the House Finance Committee will be parsed carefully for clues as to how frightening conditions really are. They will, of course, choose their words carefully. It’s not the right venue for Bernanke to disclose any clues on monetary policy—that comes next week in the semi-annual testimony—but as the Fed seeks new regulatory powers out of necessity, we want to know what the “necessity” looks like. Commentators are pretty sure the Fed is seeking to extend the special auction facilities for investment banks into next year, among other things, which implies such liquidity provision is needed or will be needed. Since Paulson is advising Bernanke on conditions within the market and Paulson has really good inside information, we can’t say Bernanke is the ivory-tower guy who doesn’t really know what’s going on.

Together they are quite a powerful force.

We now have two big reasons not to expect a Fed hike this year—trouble or potential trouble in the financial sector, and the slowdown worsening or at least looking longer-lasting than the usual US slowdown. It doesn’t matter if neither development occurs—it’s enough that the Fed will be staying on hold because they might occur. It looks like inflation as a top priority—as we thought from a Bernanke speech the first week of June—is out the window. From the point of view of the currency market, the Fed staying on indefinite hold is an outright US Dollar-negative.

Trichet may have said the ECB has no bias going forward after its one hike, but that is literally not believable, especially when he complained about second-round effects the very next week. The ECB will almost certainly hike again this year or early next year, widening the differential against the US. We name the section on the benchmark 10-year bond yield “the main event” for the very good reason that the yield spread is the single most reliable forward indicator of the euro to US dollar exchange rate. In the past year it has gotten tangled up in the price of oil, but the price of oil is like gold (and indeed used to be called “black gold”)—cause-and-effect are so intertwined that nobody really knows which causes which.

Other factors that supposedly “determine” exchange rates are taking a distant back seat these days, including the current account. The Fed just released a study showing that the US current account is likely to widen out quite dramatically in the coming years, but it’s no big deal and can be financed quite easily, with no negative effect on the US Dollar. Of course the study assumes oil prices do not get any higher and the dollar doesn’t get much lower, but that’s what economists have to do—hold some conditions constant.

Coincidentally, The Economist published a piece a week or so ago showing the opposite conclusion—that current account deficits do influence exchange rates. Probably the main deduction from these dueling studies is that they are academic; real traders in the real world and real global investors are looking at yield diffs and oil.

We have no idea whether oil will go to $200 before correcting to a decent (survivable) level, like $100, or whether it heads straight for $500. And nobody else knows, either. We continue to believe that restraint on speculation would be a powerful factor, but of course stricter regulation and prohibiting some speculation always faces the risk that the market just moves from the regulated location to the unregulated location (like the UAE/Kuwait).

We imagine Bernanke will be muted and grim today. We also imagine fear will rise to near-panic levels over earnings next week and fresh ratings agency downgrades. This means stocks will fall and when stocks fall, bonds become the safe-haven, depressing yield further. Add a failure-to-correct in oil, and you have a recipe for a falling dollar. Only if Bernanke is upbeat and even hawkish today can we avert this fate.

bye for Now

Barbara Rockefeller

We are unwilling to buy into the dollar rally

Outlook: We have to follow the oil story today, again, but there is some support for the US dollar from the Bernanke speech yesterday as well as subsiding panic over Fannie and Freddie.

While we continue to get data this week, eyes are already turned to Bernanke’s semi-annual testimony next week (Tuesday and Wednesday). This is one time when it pays to watch the proceedings on TV, if only to see our legislators making fools of themselves.

The Tuesday speech will include the Fed’s revised quarterly economic projections, and all eyes will be on the recession/inflation indicators. Unless the Fed knows something about a potential fresh financial market meltdown that the rest of us do not (Lehman?), the Fed is getting behind the inflation curve.

Euro to US Dollar are probably stuck in a narrow range of 1.5600 to 1.5750 for the day. We need a breakout but it seems that oil lacks the power to provide it, at least not yet. We are unwilling to buy into the dollar rally until we see perception of structural and/or cyclical change. It might be brewing, but it’s not the consensus yet.

Bye for now

Barbara Rockefeller

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By donald on 09-22-2007, 03:44 AM
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Honest rating 5
Profitable rating 4
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best around... This review has been useful for 2 trader(s).
If you are looking for a good market insight that can really help you make better decisions I think this is it. Barbara makes a terrific job with her forecasts and analysis, they just make sense...Im definitely a better trader using her forecast...Don

#2 (permalink)
By frings on 11-14-2007, 09:08 PM
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best so far This review has been useful for 2 trader(s).
I have tried a couple analysts (most of them not listed in this site )And I can say Barbara is the best so far from those I have tried. Her analysis helps me have other market objective perspectives which opens up my mind. If you are looking for some trading ideas/analysis Barbara Rockefeller will do the job.

#3 (permalink)
By Currency Today on Today, 06:21 PM
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Honest rating 5
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Simply the best
Very Witty and insightful daily commentary which i look for every day!I have been using the Barbara Rockefeller report for 4 years now and cant not fault it in any way. best £300 i spend every year!the only other report that comes close is the Steve Borrows report and you need to be a intso client of Bear Sterns to get it.Well done Barbara and keep up the good work(and making money!)

Foreign Exchange Technical Analyst Notes: Bloomberg reports that a Daiwa technical analyst thinks the US dollar vs Japanese Yen will go to 108.58, based on the so-called “golden cross” technique (13-week moving average over the 26-week version). This would be a return to the level on June 16. We say this is indeed the underlying direction— but it can easily be derailed by a fresh round of risk-aversion that has outgoing Japanese capital flying back in to the yen, lousy yield or not. The fundamentals always trump the technicals and there is nothing more “fundamental” than flight from a crisis.

Current Trading Positions

SPOT CURRENT SIGNAL OPEN OPEN POSITION
POSITION STRENGTH DATE RATE GAIN/LOSS
106.43 LONG YEN WEAK 06/30/08 105.28 -1.08%
1.9781 LONG POUND WEAK 06/26/08 1.9790 -0.05%
1.5728 LONG EURO WEAK 06/26/08 1.5681 0.30%
167.37 LONG EURO STRONG 04/03/08 160.00 4.61%
0.7948 SHORT EURO WEAK 06/19/08 0.7873 -0.95%
210.52 LONG POUND WEAK 05/05/08 207.71 1.35%
1.0226 LONG CHF WEAK 06/26/08 1.0023 -1.99%
1.0166 SHORT CAD WEAK 07/07/08 1.0212 -0.45%
0.9535 LONG A$ WEAK 06/24/08 0.9544 -0.09%
10.3300 LONG PESO STRONG 01/31/08 10.840 4.94%

Want to know more? Contact Me at

www.rts-forex.com

Higher oil means lower dollar

Outlook: On the data front, today is the second-tier NAR pending home sales data. Well, maybe not so second-tier, since today we also get a speech by Bernanke on mortgage lending at the FDIC. If we were Bernanke, we’d talk about a return to old-fashioned values like avoiding fraud, a good table-thumping, but that’s improbable.

Hard data is always good because the absence of hard data lets loose the demons of rumor and speculative chatter. Yesterday, for example, the US dollar got a boost from talk of the US releasing oil from the Strategic Reserve—entirely unfounded, as far as we can tell. That particular story was US dollar-friendly but the Lehman estimate of Fannie and Freddie needing $75 billion was not so innocent. What’s the difference between a rumor and an analyst’s estimate? We tend to think it’s the story-teller having real facts, but in the end it’s the willingness of the story-teller to be named.

We think the fundamentals do not support a stronger dollar. If fresh disclosures are coming in the banking sector, the US is a lot less likely to keep it concealed than (say) Europe. The Fed is more likely than the ECB and perhaps the BoE to come right out and say that rates cannot be hiked to fight inflation because of financial market problems. Therefore, the dollar is more likely to be sold off if and when such a perception becomes widespread. The balance is tipped the other way on the recession story. The market is more impressed by signs of slowdown/recession in Europe than in the US, mostly because the data has been mostly upbeat from Europe (if you exclude Spain) and slowdown has not been priced in. But dueling recession stories are a thin basis on which to build a strong dollar scenario.

And then there is oil. The idea that Iran is going to be reasonable is simply silly. Today it promised to bomb Tel Aviv and US ships if anybody attacked it, whether the US or Israel. That doesn’t sound like reasonableness, it sounds like saber-rattling. Oh, well, somebody somewhere is always saber-rattling. The probability of a full halt of shipments through the Straits is actually pretty low—it’s the extreme scenario. But supply problems in any of the hellholes where oil is produced is highly likely. Since demand is high, rising and inelastic, and supply is iffy (and the market is hardly about to get regulated into lower prices), there is only one logical deduction here—oil is going higher. Higher oil means lower dollar, to be crude about it. So while we may enjoy a minor boost near-term, a long dollar position is foolish over any time frame longer than a few hours.

Bye for Now

Barbara Rockefeller

We would be astonished if the euro were to fall!

Outlook: The evolving sentiment is that growth is about to get quite scary in the eurozone, even Germany, as well as Britain. It’s already under severe threat in the US, but the US is famously more resilient and flexible, so that if we do get a global recession, the US will be the least damaged and first to come out of it. This is the only basis on which a US Dollar can be seen to be “real” or to have a reasonably sound basis. The problem is that it implies capital flight into the dollar as a safe haven, and that means a certain degree of hot money that can just as quickly and easily flow right back out.

On the data calendar, tomorrow’s pending home resales (contract signings) probably fell 2.5% in May, according to Bloomberg. The data is a leading indicator of actual home sales. Forecasters are busy predicting how much farther home sales and home prices can fall. In the UK, which the US is following, the estimates are for 12-15% more price declines this year and next.

On Friday we get the trade report for May, probably a rise in the deficit to $62.4 billion, according to the Bloomberg survey, or the widest in almost two years. Exports have been a bright spot contributing to growth, but that tends to get ignored when the deficit is widening. At the same time we get the import price index, probably a rise by 2% in June, led of course by oil.

The Fed is inclined to downplay the effect of import prices on overall inflation, but that doesn’t mean inflation expecta tions are not fed by higher prices for socks. Also on Friday we get the preliminary University of Michigan July consumer sentiment index, which clearly will be a bummer.

The big event this week is institutional rather than data-driven. Bernanke and Paulson will speak at something named the FDIC Forum tomorrow. They also testify at the House Financial Services Committee (Thursday), which is spending some time on reining in credit card abuses. It’s always possible one or the other of them will say something of interest to FX traders. Paulson has been pushing a regulatory mode based on “principles” rather than exact, specific regs for every little thing. We say the implication is that we no longer have principles and somebody has to tell us what they are, which in turn implies we really do need exact, specific regs for every little thing.

Barring an unforeseen disclosure, we have little faith in the dollar rally. A sustainable rally needs a few things that are missing, like falling oil prices, a narrowing yield differential or even (golly) a positive one, and confidence in the US “dollar policy.” Since the US doesn’t actually have a dollar policy, can’t control the price of oil and is unwilling so far to take the monetary policy actions necessary to lift the long end of the yield curve, the current dollar rally is built on air. Looking at it from the other side is a little more promising.

All the commentary on the UK, for example, is negative. Japan’s outgoing capital flow has no end in sight, modest increases in domestic inflation notwithstanding. As for Europe falling into recession and staying there, it’s still a maybe. What’s potentially most interesting is a wholesale loss of interest in the top emerging markets, specifically China, once the Olympics are over and lots of westerners get to see conditions on the ground. China is rushing as fast as humanly possible to tart up the place and it will restrict travel outside the zone of the games, but never mind—we will get plenty of reports.

We expect the dollar rally to be short-lived but want to know how far the correction can go. Two obvious spots to watch are the last intermediate low, 1.5469 from June 23, and the one before that, 1.5303 from June 13, which formed a double bottom with the low before that, 1.5284 on May 8. We would be astonished if the euro were to fall to that double bottom low and so we name the worst case scenario at 1.5275, but more likely a much higher level.

ECB obviously knows the rate hike will support the euro

Currency Outlook: As we noted yesterday, there are three factors today—the ECB rate hike, the Trichet press conference and US payrolls. The ECB hike information comes out at 7:45 am ET, payrolls is at 8:30 am ET, and the press conference is scheduled for 10 am ET.

After a month of advance warning, the ECB is pretty much obliged to hike and by the full 25 bp. Any idea of 12.5 bp went out the window when inflation came in at 4%. The ECB obviously knows the rate hike will support the euro and while they don’t like it so high (because it may harm exports), inflation is the first priority (and signaling extreme caution on inflation is good for inflation expectations). Oil is high and rising, so at least a higher euro can be accepted as an offset. There is almost nothing Trichet can say that will prevent the market thinking a series of hikes has to be in store. Is it possible he will threaten intervention? No. Trichet is a very good central bank gov and will show grace under fire today.

US payrolls is released between the ECB action and the Trichet press conference. We have already reviewed the numbers at length—a range of –15,000 to –150,000. Yesterday ADP Macro contributed its estimate for the private sector component—-minus 79,000. A bright spot is that small firms added some jobs, although even the service sector was a net loser. (We get the service sector ISM later this morning, too.)

All three events are thoroughly priced in already, although that won’t stop traders from taking the euro much higher if the outcomes are worse than forecast. The probability of three dollar-supportive surprises is almost zero. Even if the ECB hikes by only 12.5 bp, Trichet promises “one and done” and by some miracle US payrolls are strong and positive, nobody will believe it’s anything other than an anomaly.

We often get a spike up and a spike down in the euro dollar at a central bank meeting and at payrolls, so today is doubly dangerous. We might get a rebound in the dollar once the bad news is out, which often happens—but it tends not to last very long, and today is a short day in all the US markets ahead of the holiday tomorrow. Senior traders are off the desk, leaving the juniors behind to follow orders, which certainly can’t be to go long the US Dollar into the long weekend.

An opinion piece in Market News says that usually markets like uncertainty and volatility. “This go-around, however, the uncertainty and volatility have left traders, salespeople, analysts and investors frazzled, fearful, bitter, confused, unsettled and just plain exhausted. The housing/credit crisis has gone on for over eighteen long months and there is no end is sight. And throughout those long months new problems kept cropping up along the way and there does not seem to be an end to those problems either…

“An analyst said ‘A virtuous cycle of increasing leverage and easy credit (2003-2006) has turned into a vicious cycle of deleveraging (2007-present)… whenever asset price growth outstrips real economic growth, especially by so large an amount over such a short period of time, it is a sign that intangible (i.e. phantom) wealth has been created. The current unwinding of leverage is painful, but necessary, to normalize the long-term rate of growth in asset prices to that of the real economy.’ The strategist also says that an alternative to deleveraging is very high or "hyper" inflation - something that is worrying the Fed right now.

We say this is exactly right. We are not getting the wished-for hawkish Fed comments, but surely they are in the pipeline. First the banking sector has to get cleaned up some more. Only the Fed knows where it sees stress cracks—it’s not telling us. If all the damage is already done to the big financial institutions— maybe more than enough, if critics of FAS 157 are right and assets worth something have been marked to zero—-maybe it’s the smaller fry at risk. The point is that as soon as the Fed can decently act, it will. Fed action may be postponed but it’s not lost and forgotten. We do not buy the idea that the Fed is any less anti-inflation than the ECB. As Kudlow puts it, where is Bernanke’s “inner Volcker”? We expect the Fed to act and act strongly with a series of hikes once it thinks the minefield is cleared. That means there is hope for the dollar at some point at the end of a long and winding tunnel. We can’t see the light yet but it is there.

In the meanwhile, gloom is the order of the day.

Bye for now!

Barbara Rockefeller

Note to Readers: Tomorrow is a National Holiday in the US (the 4th of July, Independence Day), and we will not publish any reports.