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