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.