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.