Thursday, August 28, 2008

potential correction in the US dollar upmove on many charts.

Technical Foreign Exchange Analysis Notes: We are seeing signs of a potential correction in the US dollar upmove on many charts.

We can now draw a resistance line capping the US Dollar upside on the Japanese Yen, Swiss franc and Canadian Dollar charts, and all the charts show falling momentum, even the Pound We already jumped on two breakouts that turned out to be false, do we feel thrice shy. Having said that, however, we can easily see the connection between the news and the chart developments. Important European officials said the ECB is not considering a rate cut and could even look at a hike if the economic picture brightens, while the US financial sector has yet to disclose everything and hit bottom. Perception of a European rate cut was always wrong, and now traders are facing up to it.

Bye for Now

Barbara Rockefeller

Need to Buy Dollars - Best Exchange Rates for Dollars at IMSFX

Possibility of Gustav turning back into a hurricane and hitting the Gulf

The Oct NYMEX crude oil contract rose to a high of $119.63 yesterday, although closing down a bit at $118.15, and is back up to $119.14 at 11:34 am GMT today on the possibility of Gustav turning back into a hurricane and hitting the Gulf. It has the potential to be as damaging as Katrina and Rita, although FEMA says the region is better prepared this time.

Bye For Now

Barbara Rockefeller

US dollar defensive but still trending toward 1.4328 against the Euro

Foreign Currency Exchange Outlook : The US dollar is on the defensive but still trending toward the spike low last December at 1.4328. Maybe we will get a corrective move this time and we certainly want to go into the long US holiday weekend without a position either way but the dollar rally is a trend, and we cling to trendedness. A trend tends to say in place until something big comes along to shake it out of its tracks. We do see two potential shakers—oil and the ECB raising rates. However, the robustness of the US economy is a possible strong offset. Is it strong enough to weather a serious oil price rise? Probably not, but again, oil is on a down trend that may have lasting power, too. The best we can hope for is a shake-out in both currencies and oil that leaves us at lower levels by the time Gustav exits the scene, say late next week, although true corrections can last longer than that.

Market observers make two points. The first is that many market players have not yet bought into the strong dollar scenario, leaving plenty of room to go. A 50% retracement of the euro’s rise from Oct ’06 at 1.2490 to the high of 1.6038 in July would take the euro to 1.4268. We like this number. It’s near the end-2007 low and it’s more in line with purchasing power parity. Nobody would argue that the euro exchange rate is not horribly overvalued at current levels.

The problem is the principle of currency markets that the currency with the rising interest rate/yield is the currency that benefits from global investment flows, as long as the rising yield is higher than inflation and/or expected inflation. We have a negative real return in the US today and that’s a serious drawback. Can it be fixed with hawkish rhetoric from Fed officials? Yes. All we need is additional comments from the Fed and falling oil to get the dollar back on its trend.

This is not an improbable story.

In sum, it’s too soon to bet against the dollar.

Bye For Now

Barbara Rockefeller

best exchange rates for Dollars - contact IMS Foreign Exchange

Wednesday, August 27, 2008

Fear of Oil supply disruption from Hurricane Gustav.

The Oct NYMEX crude oil put in a lower low ($112.36 vs. $113.68) but closed higher at $116.27 (vs. $115.11 the day before), mostly on fear of supply disruption from Hurricane Gustav. Also, OPEC meets Sept 9 and may decide to cut the extra 1 million barrels per day that Saudi Arabia strong-armed it into accepting. But the price rise was illogical in the face of the US Energy Dept reporting that US demand fell in June by 5.6% y/y, a bit less inelastic than we might have thought.

A remaining problem is whether China stockpiled so much ahead of the Olympics that now it needn’t resume the torrid pace of the past year or so.

Oil is trading on the high side at $117.36, still influenced by Gustav possibly becoming another Katrina. It will hit the Gulf around Aug 31, according to the National Hurricane Center.

Bye for Now

Barbara Rockefeller

currencies that retail Japanese traders can trade

The Tokyo Financial Exchange will expand the number of currencies that retail Japanese traders can trade, from 7 to 25, in late October. That may mean the Australian dollar and New Zealand dollar, perennial favorites of yield-seeking Japanese, could get eclipsed by the likes of the South African rand and Turkish lira. Of the 25, 11 are cross-rates, which to the Japanese includes euro/dollar. The sums are not trivial. The NKS quotes a trader as saying the amount in the Aussie and Kiwi together is $21 billion. Consider the yield on some of the soon-to-be-available currencies—Mexico, 8.25%; Russia, 11%, South Africa, 12% and Turkey, 16.75%.

Bye For Now

Barbara Rockefeller

fate of the US dollar depends on the weather

Foreign Exchange Currency Outlook : The idea that the ECB will cut rates near year-end or in Q1 got a dose of cold water today with comments by Weber and Bonello. (Told you so.) If inflation in the eurozone really is 4% in August, as Bonello suggests, the US dollar is at great risk of taking a tumble off its newly acquired throne. The other major threat to the dollar is oil, and we can’t get a good read on that until we know whether Hurricane Gustav will hit oil facilities, both production and refining, in the Gulf (which supplies over 25% of US refinery needs). If you remember Katrina, the US dollar crashed by a huge amount immediately upon landfall and kept going down for weeks. It’s awful to think that the fate of the US dollar depends on the weather, but there it is.

We are feeling a little gloomy going into today’s US currency trading session.

These are big winds against the dollar.

But keep the faith—the economic material is actually quite good,

whatever the sky-is-falling crowd may say.

Bye for Now

Barbara Rockefeller

Best Exchange Rates - Contact IMS Foreign Exchange

Tuesday, August 26, 2008

CFTC Commitment of Traders report

Market News notes that judging from the CFTC Commitment of Traders report, most speculators are getting ever-shorter the euro and yen, but plenty of foreign exchange traders remain sidelined or the wrong way, implying that not everyone has jumped on this bandwagon yet. As of Aug 19, spec increased euro shorts from 19,427 contracts to 20,364. This is minor compared to big-move levels like 75,000-100,000 future contracts. It’s bigger in the yen, where shorts increased from 13,249 contracts to 23,138 contracts.

Bye for now

Barbara Rockefeller

A Katrina level hurricane can destroy the US dollar in a day or two

The Oct NYMEX crude oil put in a lower low ($113.68 vs. $114.18 the day before) but a higher close ($115.11 vs. $114.59). Overnight, though, it fell as far as $112.80 and remains low at $112.90 at 11:01 am GMT. The “reason” seems to be actual loading of Baku pipeline oil in Turkey. Or perhaps it’s the dollar rising. Both reasons are given, and as usual, “the dollar is up because oil is down.” In addition, Bloomberg reports, tomorrow’s US inventory report is likely to show a rise in crude by 1.1 million barrels in the latest week because refinery operations are lower than in previous years, with refineries operating at nearly 14% below full capacity.

Meanwhile, a threat to this lovely development is Tropical Storm Gustav, headed out of the Caribbean at hurricane strength and headed perhaps for the Gulf. A Katrina-level hurricane can destroy the US dollar in a day or two.

Europe - recession / US - no recession

Foreign Exchange Currency Outlook :

The perception continued to hold the imagination that the ECB will be cutting rates early next year. Lehman, for one, says the nearly unprecedented rise in the US dollar (second best in 35 years of floating rates on the Fed dollar index basis) will keep going. Lehman sees the euro at 1.43 by year-end and 1.40 by the end of Q1 next year. Since we are already under 1.4600 this morning, we’d say 1.43 will come faster than year-end, and maybe 1.40, too—but not because it’s realistic to think the ECB will cut.

We have no reason to believe the ECB will cut rates. Trichet and others, especially the influential BBK chief Weber, have repeatedly said “single mandate” and that is inflation. Growth doesn’t come second—it doesn’t enter into it at all. With some unions belligerently demanding catch-up money under inflation, the boogey-man of second round effects is no longer a rhetorical trick—it’s real. Theoretically, the ECB couldn’t or shouldn’t cut to help the financial sector, either, like the Fed. If the ECB is stubborn, as we suspect, we could see Europe sliding into recession.

Growth counts in the currency market. Despite all the problems in the US economy today, including the prospect of another year of housing price declines and additional financial sector failures and/or bailouts, we still are not going to see two quarters of flat or contracting growth. The recipe of “Europe--recession/ US--no recession” is euro negative and dollar friendly. You don’t need to postulate an ECB rate cut (or a Fed rate hike) to get this outcome. Growth alone suffices. Note that the IMF is said to be near to cutting its global growth rate from over 5% last year to 3.9%, a deeper cut than expected.

Meanwhile, the Fed is between a rock and a hard place. We guess it would like to raise rates to fight inflation and to normalize (getting a positive real rate of return for investors as well as giving banks a chance to make an honest dollar), but feels it cannot because it might destabilize the financial sector. Besides, to hike now would be to repeat the mistake of the early 1930’s. All the same, Bernanke gave a clue at Jackson Hole—we are lucky to be getting a drop in commodity prices and a rise in the dollar. If these developments continue, economic recovery comes along in their wake, and with less inflation, to boot.

But here’s the rub—Bernanke, like all other government officials, doesn’t believe in forcing market prices to go in the desired direction. Most professional economists in the US say “let the market decide.” To do otherwise—to engineer prices and manipulate markets—is to risk unforeseen and undesirable consequences. It’s also to be socialistic or pinko in some way. To tar all government intervention as pinko is dumb, but we have a long tradition in the US of seeing things that way, a bias that reached full bloom under Reagan. It’s poppycock, of course. The government intervenes in thousands of ways every day in every sector by choices made or not made in its own behavior. The government is the single largest actor on the economic stage, and that’s not even counting tax policies.

For Bernanke to say we got lucky with oil and the dollar is a bit scary. The implication is clear that he would not (for example) advise opening up the strategic reserve to ensure oil speculators keep getting driven out, or any other policy initiative that benefits the dollar. Probably the only initiative he would support politically is greater fiscal prudence, which would indeed be dollar-friendly. In sum, the dollar is the plaything of fate and not something the Fed or the government should “manage.”

This is the environment going into the election. The Democratic Party convention started yesterday, full of idealism and woefully short on real or coherent ideas. We political junkies enjoy this kind of thing but it’s hard not to see that it’s mostly hot air, self-congratulation, and nostalgia (not one but two Kennedy’s). This is a weak position against the winds that will blow from those nasty, mean-spirited Republicans. The election matters to the US Dollar not only because McCain will probably worsen the fiscal mess Bush is leaving behind, but also because nobody really knows how much Obama will spend and on what, or whether certain kinds of spending will even be possible (health care).

The world is not watching yet but it should.

The economy counts more for the US Dollar right now, but a political effect is not out of the question.

Bye For Now

Barbara Rockefeller

Best Exchange Rates - IMS Foreign Exchange

Oh, good, let’s get Iran involved with Russia.

Other Markets: The Oct NYMEX crude oil contract opened at $121.55 on Friday, near the high of $121.86, but then fell to an intraday low of $114.18 and closed near the low at $114.59. As noted above, this was a huge one-day high-low move and the close is down $6.59 from the close the day before ($121.18). The price of oil doesn’t account for everything that happened to the US Dollar on Friday but it gets the lion’s share of the credit.

However, this morning oil traded up to $115.80 on news that Russia is supporting two breakaway provinces on Georgia, with the Russian Parliament's Upper House voting unanimously to recognize the independence of South Ossetia and Abkhazia. These are the two regions that got Russia involved in the first place. Meanwhile, the Baku-Tbilisi-Ceyhan pipeline, which runs through Georgia, resumed operations, so that’s a bit of an offset. Bloomberg reports that “Azerbaijan sent oil to export via Iran because of the disruption, and Iranian Oil Terminals Co. received the first cargo for transit yesterday, according to the Iranian Oil Ministry's news agency, Shana.”

Oh, good, let’s get Iran involved with Russia.

One interesting piece of oil news is a report from the FT saying that “China’s state-owned oil companies are likely to stop imports of refined products such as diesel and petrol next month after a nine-month buying spree that has left stockpiles overflowing, one of Asia’s largest refiners said. [A trader] confirmed market expectations of an imminent end to a buying binge from Sinopec and PetroChina that has supported refining margins in the region but has been suspected of being out of line with end demand.

“Industry experts have attributed the buying binge to political orders to refiners to avoid shortages during the Olympics. The import wave had been boosted by tax rebates granted to Sinopec and PetroChina for imports of refined products. However, much of the imported petrol and diesel has been stockpiled rather than consumed. “The state refiners’ stockpiles are so full that they have been reselling the stuff,”

Bye for Now

Barbara Rockefeller

need to Buy US Dollars? Contact IMS Foreign Exchange

the US dollar is the best of a bad lot

Foreign Exchange Currency Outlook : One Currency analyst in the FT said sentiment is turning toward the idea that “the US dollar is the best of a bad lot.” This is a somewhat insulting version of the FIFO idea, that the first to enter crisis is the first to emerge from it. A key aspect of this version of events is that the Fed may not have rate hikes on its mind, whether to normalize or to fight inflation, but the ECB will be forced to cut interest rates to boost growth by Q1 next year.

The more we think about this line of thinking, the less we like it. For one thing, not every country that goes into a crisis does emerge from it. Think Argentina or Russia. The US is a special case, of course, but even to put it in the same company as other “developed” countries in Europe or Japan is wrong. Both the private sector and the public sector in the US act far faster and with bigger initiatives than elsewhere, for one thing. While the crisis may be less in other places, like Japan, their recovery will trail the US by a long margin. Japan barely came out of a decades-long deflationary slump before the newest crisis. There is nothing inevitable about the course of economic cyclicality.

We have been here before—the US coming out a cyclical turndown (and note that we haven’t seen that yet) while the rest of the world suffers a hangover for a considerably longer time. The longer the US problem, the longer the other guys’ recovery. But there’s a fly in this ointment and it’s named BRIC. Brazil, Russia, India and China have the economic heft to overwhelm US effects on other economies. We already saw China and India siphoning direct investment away from the US, and emerging market demand generally causing the oil price spike. One estimate has it that all the increase in demand for energy comes from emerging markets, which subsidize it heavily. This is a transfer of wealth from one set of emerging markets to the oil producers, and oil producers don’t give all of it back in the form of trade or investment.

So far the US is a beneficiary of this, but the US is hardly out of the woods on financial sector woes. Global investors can still be spooked by developments in the US. This week we get additional housing sector data that bears directly on the health of US financial institutions. If investors start disliking the US and the dollar gain, cui bono? We honestly don’t know.

Britain is in the soup.

Europe is hiding problems.

Maybe Australia and Canada again on commodities alone.

Bottom line—it’s not a straight line out, for anyone.

Another reason to dislike the FIFO scenario is that the policy goals of the two key central banks are different. The ECB cares only about inflation. To say it will be “forced” to cut rates to goose activity is to ignore the nine years of its existence. To believe in an ECB rate cut is to fail to heed Mr. Trichet and Mr. Weber, too, and to believe in fairies at the bottom of the garden. Unions are already girding their loins for the next wage round, most of which comes in

Q1. Rate cut in Q1? Not likely.

And so here we are back again at the bottom line—and it’s oil. Housing prices and existing or new home sales can be any number, but if oil doesn’t cooperate by resuming and maintaining the downtrend, it won’t matter. Oil is everything. Well, it’s not everything because the economy rolls on at any and all prices for oil, but for the US Dollar trend to secure its place as a true multiyear trend, oil simply has to keep falling. It’s as simple as that. We need to watch demand from China and we need to follow the ridiculous stories about Russia, Georgia and other places with names we can’t pronounce.

Sentiment is becoming ever more pro-US dollar as this move proceeds, and that’s nice but it can’t be counted on. A giant screw-up with Freddie/Fannie, or a big bank failure, could postpone the resolution of the financial sector problem. Several big-time analysts like former IMF economist Rogoff have warned about additional failures, including among regional banks. This wouldn’t derail the dollar like oil, but it can’t be dismissed, either. So the dollar has two potential strikes against it, oil and the financial sector. We think the US dollar is safe for the moment, in part of the technical analysis, which are powerful in their own right.

But we need to be alert—the US Dollar is not out of the woods.

Bye For Now

Barbara Rockefeller

Need to Buy euros - Best Exchange rate contact IMS Foreign Exchange

Friday, August 22, 2008

NYMEX crude oil contract rose dramatically

The Oct NYMEX crude oil contract rose dramatically to $122 and closed at $121.18, over the red 20-day moving average on our chart and over the downsloping channel. However, it fell back overnight in electronic trading (for the first decline in 4 days) after Turkey announced the Baku pipeline is back on line—and the US dollar recovered.

Crude oil for Oct delivery fell as much as 98¢ to $120.20 and was up only a little to $120.44 at 10:36 am GMT. Bloomberg says “the contract is set for a weekly gain of 5.9%.”

Where does that leave us?

Nobody knows.

Bye For Now

Barbara Rockefeller

choppy trading in oil and the US dollar

Foreign Exchange Currency Outlook : What really has changed in all this choppy trading in oil and the US dollar? Not much. We could redraw our channels to accommodate the activity this week and try to forget the whipsaws. By such a measure, the yen would still be headed for 112 and the euro would still be headed for 1.4000. This is what sentiment analysis indicates should be the case, and only the oil outlook puts it in danger. To some extent, today is a test of pro-dollar sentiment vs. the correlative power of the price of oil.

We get no data today of any real interest, so attention will turn to what the charts say and possibly to what’s going on in Jackson Hole, where the Kansas City Fed is holding its August conference. Bernanke is scheduled to give the keynote speech (on financial stability) at 10:00 am today, so we may get a sound bite or two. You have to wonder whether he will name housing price stability as a cornerstone of overall financial market stability. This was an assumption in Gov Mishkin’s speech last year, or rather his idea that falling house prices have a bigger effect on the public than falling prices in any other asset class.

Market News reports that all of the members of the Federal Reserve Board will attend, along with the presidents of the regional Feds (Atlanta, Boston, Chicago, Cleveland, Kansas City, New York, Philadelphia, Richmond, San Francisco and St. Louis). Also attending are ECB chief Trichet, BoE Deputy Gov Bean, BoC Gov Carney, BBK Pres Weber, BoJ Deputy Nishimura “and a host of other senior central bank officials from numerous nations.” This is a little like G8 without Russia and in cowboy boots.

Market News Fed watcher Beckner notes that some of the discussion at this year's meeting "is likely to be fairly critical of the central banks' preparation for and response to the subprime crisis… It might be called a post mortem on the crisis, except that the crisis has not died. It continues to reach its tentacles into new, sometimes unexpected areas, spreading its damage far and wide." Bloomberg reports that former BoE policy member Buiter is attending and will speak tomorrow. He said “There will have to be a lot of soul searching about whether central banks, in their rush to forestall a financial disaster, have created moral hazard and perverse incentives on an unprecedented scale.'' It would be nice to hear some remorse from Bernanke about moral hazard.

Chartists are tearing their hair out today. It’s a fairly sound principal that an active trader has to jump on a breakout or miss a big opportunity. There are more false breakouts than real ones, however, and so you have to be nimble and able to change your mind on 10 minutes’ notice. We thought it was a real breakout yesterday and traded on it. Today we are eating crow.

We use the linreg channel (technically a standard error channel) as a key indicator of a breakout, along with other indicators like previous key levels and relative strength. As noted above, we can absorb the anti-dollar breakout easily as long as it reverses today, as seems to be the case. This will be the triumph of sentiment over the price of oil, and to a certain extent, the power of short-term charts. Longer-term charts (daily and weekly) were better, and the correction can be seen as only a storm in a teacup. But we have to see where things close today. Next week marks the end of summer and the following Monday (Sept 1) is a holiday in the US. All the action will take place in the first three days of the week, probably. If the dollar recovers and the creek don’t rise, September could be interesting, not least because we expect a trend to resume with more gusto after a false breakout.

Bye for Now

Barbara Rockefeller

Need to Buy Euros or US Dollars contact IMS Foreign Exchange

Thursday, August 21, 2008

US Crude Oil Inventory Report

The Sept NYMEX crude oil contract closed at $114.98, up from $114.52 the day before. Every bar component made a higher high, including the high of the day itself $$117.03 from $116.65 the day before). Market News notes that yesterday was settlement day for the Sept contract and that contributed to roller-coastering. Also, analysts name the US inventory report and tension with Russia, as though Russia wants to make less money from oil just to punish the west for setting up a missile shield in neighboring country Poland. We find the “geopolitical” story about Russia unconvincing. It’s on a par with Iran impoverishing itself and risking domestic unrest by halting oil shipments through the Straits of Hormuz.

Yes, politicians can be irrational but they are not usually totally stupid.

The US inventory report is more important. It showed gasoline stocks fell 6.2 million barrels last week when 3 million was forecast, meaning refiners are running slower now that demand for gas is lower (about 1.6% from a year ago). Oil inventories rose 9.39 million barrels to 305.9 million barrels, the biggest gain since March 2001. It’s not at all clear why a big rise in stocks did not cause the price to fall with any lasting effect. Prices did fall right after the report, but they failed to stay down. We think that means there are some determined buyers out there… or the refinery inventory adjustment is a more powerful story.

Bye for Now

Barbara Rockefeller

Does the US dollar need ever-falling oil prices to thrive?

Foreign Exchange Currency Outlook : We didn’t get any good data yesterday, allowing the Lehman rumor to get a foothold overnight. Once it looks like there may be blood on the street, traders hover around, ignoring other things, until they get blood or lose interest. Today we get some data that may draw attention, including the usual Thursday jobless claims, the Conference Board leading indicators and the Philadelphia Fed survey. Jobless claims are likely to be less bad but the total remains on a rising trajectory (440,000).

The Conference Board leading indicators probably fell 0.2%, although the forecast range is a wide –0.9% to +0.1%. It had fallen 0.1% in July over June. The index “predicts” conditions 3 to 6 months out, and so can be a sentiment-sapper. Bloomberg says seven of the 10 indicators that make up the leading index are known ahead of time: 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 goods, bookings for capital equipment and the money supply adjusted for inflation.

The Philadelphia Fed's general economic index is due at the same hour, 10 am ET. The consensus forecast is –12.6 but the forecast range is –22.4 to –5, after –16.3 in July.
If Bloomberg is right and the Philadelphia Fed index goes to –12.6, that is still a contraction but less than –16.2 in July. It will be a below-zero reading for the 9th month. As we have noted before, when the bias toward the dollar is favorable, traders shrug off bad news. When it’s unfavorable, they ignore good news and exaggerate bad news. The Philadelphia index could be considered “good” but if it’s true that sentiment is turning negative again, it will be seen as bad even though it’s not—it’s less bad than before.

Therefore, watch the dollar at 10 am when the Philly Fed release comes out. It will tell us whether the dollar is going to correct more. Seldom do we get such a clear case of “event” trading. The surprise factor may be if the index is only –5 when a bigger number is expected, or worse than the median forecast of –12.6.

We see a pivot level in euroto US Dollar around 1.4835-50. If the euro rises over that, we can see it going to 1.5190, another pivot level (and the linear regression value from Aug 8). Note that 1.5171 is the 38% Fibonacci retracement of the move from 1.6038 in July to the lowest low 1.4641 last week.

These are crisis correction levels. It may not get that far. Yet another number is simply the highest high so far (1.4833 as Asia was handing off to Europe overnight). If the pattern this week is repeated, we will get US traders refusing to match that high. If they fail to defend the dollar, there’s still the top of the linreg channel on the hourly chart, 1.4930-40, lying under the 25% retracement. On the whole, we think that US traders are less frightened of Fannie/Freddie than Asians. After all, Freddie just raised $3 billion this week, if at a high price, with a big chunk coming from Asia itself.

As for Lehman going under, that is unlikely until earnings are released in a couple of weeks. We honestly don’t know the extent of the losses at Lehman and besides, there may be other white knights out there, assuming a white knight is needed. In general, US traders seem to be reluctant to see the US dollar on the defensive again after so many years of that posture. The US has the growth story and also faith in the Fed.

What it may be losing is the oil story. A high of $117.03 yesterday is awfully far over the low last Friday at $111.34, which at least was kissing distance of the key $110 level, not only the low from last May but near the 200-day moving average. Does the US dollar need ever-falling oil prices to thrive? Not exactly, but it goes back on the defensive without it and thus has to deliver uniformly great economic and institutional information. And how likely is that? News from the US may be better than elsewhere, but there are plenty of bad news stories and, possibly worse, rumors of bad news.

Two things loom on the wider horizon—OPEC’s Sept summit and the US election in November. OPEC could easily decide to pull back now that demand has fallen. Saudi Arabia may continue to pump at full blast, and OPEC is a weak cartel with lots of cheating, but the announcement effect can still be a big one. As for the US election, a McCain presidency is bad for the dollar because it implies continuation of ruinous government spending, mostly military, when the world really wants the US to adopt a more prudent stance. Excessive public debt is a real problem when yoked to a giant current account deficit. In sum we expect the dollar to survive today without matching the overnight euro high, but going forward into tomorrow and next week, the last week of the summer, it faces some stiff headwinds.

Bye For Now

Barbara Rockefeller

Need to Buy US Dollars? Best Exchange Rate at IMS Foreign Exchange

Wednesday, August 20, 2008

oil should be neutral or positive for the dollar today.

The Sept NYMEX crude oil contract closed up at $114.53 from $112.87 the day before, and traded as high as $115.36 overnight before claming down to $114.53 at 10:20 am GMT today. The chart shows oil is consolidative and broke the channel top, although it’s a new channel so we don’t need to worry too much just yet. The low is lower ($111.64 from $112.00) but the high is higher ($116.65 vs. $115.35), so the bar isn’t giving us a clear signal.

It needs to break the May 1 low at $110.30. The US inventory report is due today, probably a build in crude by 1 million barrels in the week ended Aug 15 from 296.5 million the previous week, according to the Bloomberg survey. Supplies of gasoline probably fell a fourth week, by 3 million barrels last week from 202.8 million barrels the previous week, also according to Bloomberg. The Baku-Tblisi-Ceyhan pipeline, closed since Aug 5, will resume operations next week, says operator BP.

On the whole, if the news comes in as expected, oil should be neutral or positive for the dollar today.

Bye for Now

Barbara Rockefeller

US dollar’s fate is linked directly to moves in commodities.

Foreign Currency Exchange Outlook : We don’t get a lot of releases today, thank goodness, mostly mortgage applications and the Energy Dept’s oil stocks in mid-morning. Last week the oil stocks report was a catalyst but unless there is a surprise today, the report should be neutral. With the Baku pipeline supply in the offing, prices could fall again.

It’s a sad thing to say, but the US dollar’s fate is linked directly to moves in commodities. With both oil and gold up yesterday, the US dollar was undermined and we are a little surprised at its overnight recovery, which seemingly comes on renewed optimism that the US economy will weather the current financial market storms, including Fannie/Freddie and Lehman. This is a nice touch of confidence that would build if we could get some bad news from Europe. That’s a rotten thing to say and of course nobody wants to hear that Europe is experiencing troubles, but it’s true all the same. It’s the relative performance of the two economic blocs that counts, so if the focus is on US problems, European problems have to be worse for the dollar to prevail.

Another way of looking at things is to note that the Foreign Exchange market is now embracing the US dollar rally and is fighting back against the knee-jerk circular logic of rising commodities (especially oil and gold), falling dollar and then falling dollar, rising commodities. This is a vicious circle of its own. To break it on “confidence in the US economy” alone is a scary thought. Can it be done? Well, yes, if the price rises in oil and gold are not too big or long-lasting, and the move is seen as only a consolidation, not a reversal. Plus, it would help to hear more comments like Fisher’s, that the Fed really wants to raise rates off their abnormally low levels to fight inflation and we can’t count on the slowdown to do the job.

As always when prices move into consolidative mode, we are now in search of new factors to move us out of the emerging range. We want something to move the euro lower than 1.4627, yesterday’s low, lest we get a move over 1.4806, the overnight high. We don’t see it on the horizon, though—and don’t forget that sheer uncertainty can be bad for the dollar. All we would need is a rumor, and don’t think for a minute that traders are above starting rumors just to stir things up. Low volatility in a narrow range is a bad thing—it makes prices vulnerable to an oversized response to a shocking story (that might not even be true).

On the whole, though, we are inclined to think the US Dollar rally is here to stay and will resume today after the most disappointing of minor corrective moves. At some point we have to expect a bigger correction that we can opportunistically latch onto, but in the meanwhile, it pays to stay on the bandwagon.

Bye For Now

Barbara Rockefeller

Need to Buy Euros - Best Exchange Rates contact IMS Foreign Exchange

Tuesday, August 19, 2008

Global warming, anyone?

The Sept NYMEX crude oil contract failed to make a new low, only $112 after $111.34 on Friday, and also made a higher high ($115.35 after $115.20 on Friday) but what counts in the close. Oil closed down at $112.87 from $113.77 on Friday. Overnight it fell as far as $111.64 and it’s trading at $112.24 at 12:08 pm GMT. It needs to break the May 1 low at $110.30.

It now appears that Tropical Storm Fay will by-pass oil production facilities but could cause major damage in Florida, which can’t get a break.

Global warming, anyone?

Bye for Now

Barbara Rockefeller

Time to Sell Euros as analyst see Euro vs US Dollar at 1.4000 or lower

Foreign Exchange Currency Outlook : The major change of sentiment in favor of the US Dollar has now been proved by the excellent ZEW outcome failing to boost the euro and the outlook for a messy outcome in Fannie/Freddie creating authentic doubts about the US financial system. Rogoff may have retired from the IMF but he’s still an important voice, and if he says we are only halfway to the end of the financial crisis, we need to pay attention. Maybe we are just tired of this kind of sky-is-falling stuff, but to shrug off the Fannie/ Freddie problem is an amazing response. Perhaps it’s the summer doldrums. Perhaps it’s a deep confidence that whatever hash we make of Fannie/Freddie, the US system is basically sound and thus upcoming woes are “only cyclical.” We doubt the “only cyclical” viewpoint but we need to wait to see how the markets respond. It’s not a tempest in a teacup.

Meanwhile, the FIFO argument (the first into a crisis is the first out) is running strong. Europe seems headed for a downturn, at least in some countries (France, Italy, Spain), even if Germany is weathering things okay. The US may have recessionary spots but will benefit hugely from falling oil and other commodity prices. If they were a bubble and it is now burst, oil could fall to $80, or at least under $100, which relieves a great deal of pressure on inflation and inflation expectations. And as soon as the financial crisis is nearing an end, no one doubts the Fed will want to hike, whereas in Europe, the ECB could be thinking of a cut in Q1 2009, ZEW’s advice notwithstanding.

Market News reports that “Of forty analysts polled in the August 18 edition of FX Week, twenty analysts looked for the euro to be on a $1.40 ‘handle,’ nineteen saw the euro on a $1.50 ‘handle’ and one analyst saw the euro on a $1.60 ‘handle’ in three month's time. The low forecast was $1.4000 in three month's time.” This doesn’t quite add up to a normal distribution curve—it’s skewed to the strong dollar direction. Half of forecasters see $1.40—wow.

Market News notes that one forecaster seeing 1.40 in three months time is Standard Bank, which also sees the euro at 1.4500 in 6 months and 1.3500 in a year. Its reasoning is about the same as ours—relative economic conditions favor the dollar, as does the oil/commodity bust. (Weirdly, Standard forecasts the yen higher, as do many other forecasters, which we simply can’t grasp. Why do the same principles not apply? The usual reason is carry-trade unwinding. But we say carry trades are the tail, not the dog.)

Watch oil. Oil is everything these days. We need to see the price fall under $110 and then we will be off to the races, technically.

If the dollar follows in lock-step, we could be looking at 1.4000 by end-September, and not have to wait three full months.

Bye for Now

Barbara Rockefeller

Need to Buy Euros - Best Euro Exchange Rates visit IMS Foreign Exchange

Monday, August 18, 2008

Sept NYMEX crude oil futures contract hit a new low

The Sept NYMEX crude oil futures contract hit a new low of $111.34 and closed down on the day before at $113.77. This loves lovely on the chart but the update is not to nice—overnight Tropical Storm Fay is over Cuba and causing oil companies to evacuate some deep-water facilities in the Gulf. It will hit Florida if it hits anything. The price rose as high as $115.35, although it’s back to $114.16 at 10 am in London. Meanwhile, the damaged pipeline in Turkey will be back in a day or two, although somebody blew up a bridge in Azerbaijan. Separately, Bloomberg reports that commodity investors are fleeing. A Lausanne money manager of $8.5 billion in commodities said investors are withdrawing some funds after a drop in prices.

Bye For Now

Barbara Rockefeller

Australian Dollars leads the euro

Currency Technical Notes : Everything is bouncing counter-trend a little. The one that might have some legs is the Australian dollar, and don’t forget, for reason nobody can figure out, the Australian Dollars leads the euro. The slope of the linreg channels is too steep. It’s sensible for prices to correct to create new highs so that the slope gets to a sustainable angle. Conventional wisdom (from Gann) has it that 45 degrees is a good slope.

Separately, see the gold chart. Gold closed at $786, well under the channel bottom and on an opening gap down. We think it can bounce up strongly, to back inside the channel, even it turns out to be a dead-cat bounce. Gold is not important per se but some traders think it always has an inverse relationship with the US dollar. This is demonstrably stupid but never mind—if some people think it and others are trying to trade in anticipation of “the crowd,”

we will get gold up, dollar down, at least for a few days.

Bye for Now

Barbara Rockefeller

For the Best US Dollar Exchange Rates contact IMS Foreign Exchange

Oils next stop is sub-$100 and time to Buy US Dollars again.

Foreign Exchange Currency Outlook : It’s only normal to expect a pullback in a two-week rally. Prices simply do not move in a straight line indefinitely. We thought we saw it coming last week but it was only the slightest of burps, perhaps because the market is quite thin due to summer vacations. Is it true that the bigger the move, the bigger the correction? Yes, probably, but each one is slightly different and anyone who says it will be 23% or 38% or some other number is full of hot air. A lot depends on the reason for the correction.

Any old reason will do, whether it’s a good one that justifies a counter-trend move or not. This time, if it’s a temporary rise in the price of oil and other commodities, it will be taken seriously—but those markets have their own dynamics, too.

We are still trying to understand why oil fell so hard, and if the oil market traders think those are good reasons, the oil slide will continue.

We say that if oil breaches the most recent lowest low from May 1 of $110.30, the next stop is sub-$100 and the US dollar is golden.

The main economic consequence of falling oil is a reduction in inflation and inflation expectations.

That takes heat off the Fed but more importantly, it takes heat off the ECB and thus makes a cut in Q1 a more reasonable forecast. While normally we want to see the Fed in hawkish mode, it also serves to see the ECB is more dovish mode. Note also that falling inflation globally hastens expectations for rate cuts in Australia and the UK.

To think about the bigger picture, consider two pieces of data in one breath—last week it was reported that the eurozone economy contracts for the first time ever since the euro came into existence in 1999. On Friday, the Reuters/University of Michigan index of consumer confidence rose to 61.7 in early August from 61.2 in late July.

So, correction or not, we want to stay focused on the opportunities for the US dollar to hang on to its rally (instead of looking for reasons for it to end).

Bye for Now

Barbara Rockefeller

Buying US Dollars and want the best exchange rate

Contact IMS Foreign Exchange

Friday, August 15, 2008

How far can sterling go? UK interest rates to hit 3.5%

The FT has a piece on the Pound to US Dollar exchange rate, saying that it has fallen for the past 11 days and this is the longest slide in 37 years.

Well, by some reckoning, maybe.

In 1992, it fell from 2.0100 in September to 1.4068 by Feb ’93. How far can sterling go?

Tell me where the Bank of England will take interest rates, says the FT, asserting that this is “technical analysis.” It’s not. It’s fundamental analysis.

Sigh.

The broker Tullett Prebon says that if interest rates are cut to 3.5% by the end of 2010, sterling could fall as far as 1.7000.

We’d take it a bit further to 1.6500, the most often-occurring quote for sterling over a long period.

Bye For Now

Barbara Rockefeller

Crude Oil fails to rally

The Sept NYMEX crude oil contract failed to make a new high, missing the high the day before by 4 cents ($117.42 vs. $117.46 on Wednesday). It may sound silly, but 4 cents is all the world—it means bulls failed. The price obediently closed down 99 cents at $115.01.

Bye For Now

Barbara Rockefeller

US may be less vulnerable to the woes of globalization than the eurozone

Foreign Exchange Currency Outlook :

Yesterday and overnight in Asia, foreign exchange traders were beguiled by the difference in GDP growth rates in the eurozone (0.2% in Q2) compared to the US (1.5%). While the US may have gotten a boost from tax stimulus checks in Q2 and that’s a one-time thing, the stimulus can’t account for everything. Besides, Europe has a booming export sector and while the US export sector is no slouch (and the US is in fact the world’s largest exporter, with China coming up fast as Number 2), exports do not account for such a big percentage of the economy in the US. Some exporters say the global slowdown is already starting to hit US orders, but the effect on the overall economy should be minor.

In other words, the US may be less vulnerable to the woes of globalization than the eurozone, especially those woes that originate in the US, like the subprime paper meltdown. Well, this only goes to show what we have been saying all along—the US economy is fundamentally more robust and flexible than any other economy in the world.

It can weather the most horrendous problems that would strike others to their knees—bad management everywhere (from Orange County to Enron to Fannie/Freddie), a giant budget deficit with no will to address it, dicey accounting practices and undercapitalized banks, and let’s not forget Bush and the two-front war.

The US is in almost as bad shape as when those idiots in Congress closed down the government and TreasSec Rubin had to borrow from the Exchange Stabilization Fund to avoid default on US Treasuries. In the end, the chief outcome of that debacle was the Monica Lewinsky affair and a curiously short-lived hatred of Republicans like Newt Gingrich. In short, the US is shrugging off all these awful conditions as it always does, and the economy keep rolling along. The election is 80-some days away and the Republican candidate says there is nothing wrong with the economy—no recession. The Democratic candidate would throw the public a $1000 bone but let’s be realistic, all the real action is under the Fed (which didn’t exist when the Constitution was written and has unknown powers today). This business of the Fed running practically everything should be very frightening, however noble and well-intentioned the Fed govs may be today. Power corrupts.

The financial press is full of stories about the global slowdown, including the top story of the WSJ. It doesn’t say anything new. The FT writes, “While the world fretted about whether the US economy was about to hit the wall, the eurozone had already bumped its head against the brickwork.” What the sellers of newspapers fail to understand is that the US never hits the wall. The US is astonishly resilient. It can overcome just about anything. In fact, we can’t imagine anything it cannot overcome, including full-out nuclear war. The US may no longer be the can-do country it once was, but it is still more ingenious and self-sufficient than others. We continue to think the end is in sight, perhaps by this time next year. Greenspan puts it at mid-2009, but even if it goes on for another year to mid-2010, so what? It’s a cyclical event, not the end of the world.

This is why the US dollar is going up, despite low interest rates, rising inflation, and other terrible conditions. It’s simply confidence in the US comparedto other countries. The dollar is going up because other currencies are going down. As noted above, traders and investors don’t necessarily love the dollar—they are just getting worried about conditions in other countries and thus their currencies.

And currencies are falling now in part because once a trend gets going, it takes a major Event to stop it.

Unfortunately, we can imagine plenty of unforeseen events with the power to do that—assassination, terrorist attack, Israeli-Iran war, a hurricane that drives up the price of oil again, and so on. Most of these are off-the-wall, except the oil issue.

We expect the Treasury capital flow report this morning to reflect ongoing inward portfolio investment in the US. Nobody will ever forecast the flow level (it was $44 billion last time but subject to heavy revision). As long as the inflow is roughly the same as the trade deficit (about $60 billion), nobody much cares. Even when inflow was very low some months last year, or certain categories show an outflow, the news gets shrugged off as due to some investing classes needing liquidity and where better to get it than the US? This pretty much makes the argument that the US is a dandy place to put your money—you can always get it back, and fast. In short, the TICS report will not be a factor today.

End-of-week may be a factor, though, especially in August when so many people are supposedly taking vacations. We may see some position-squaring. But historically, August and September are always big-move months in Foreign Exchange, and we do not expect the move to peter out over the next two weeks. Some folks look at the Friday close as the single most important number, and whatever it is today, it’s going to be vastly lower than a week ago (1.5010).

It’s getting to be time to bet the ranch.

Bye For Now

Barbara Rockefeller.

Buying US Dollars? Get the best exchange rates visit IMS Foreign Exchange

Thursday, August 14, 2008

Surprise drop in gasoline supplies

The Sept NYMEX crude oil contract hit a high of $117.46 and settled up almost $3 on the day at $116.00 after the Energy Dept reported a surprise drop in gasoline supplies (by 6.4 million barrels, triple the forecast and the third week of decline). Since we know people are driving less, this drop has to be due to inventory management by the oil companies and thus means absolutely nothing for the price of crude oil, but never mind—the market wanted a correction.

It may get more, one, too, if hurricanes keep developing.

Bye for Now

Barbara Rockefeller

economy contracted for the first time since the launch of the euro

The ECB issued its monthly bulletin today and said “it will continue to fight inflation even after the economy contracted for the first time since the launch of the euro a decade ago,” according to Bloomberg. “’Growth figures for mid-2008 will be substantially weaker than for the first quarter of the year… against this background and in full accordance with our mandate, the Governing Council emphasizes that maintaining price stability in the medium term is the ECB's primary objective and that it is its strong determination’ to keep inflation expectations anchored.”

Rate cut?

Not likely.

The region getting stagflation is not the US—it’s Europe.

Bye for now

Barbara Rockefeller

Need to Buy Euros - Best Euro Exchange Rates contact IMS Foreign Exchange

euro to be trading sideways

Foreign Exchange Currency Outlook : CPI is always an important number but never more so than today. Foreign Exchange Traders think that if inflation is high, consumers will be discouraged even more (having spent their stimulus checks) and if employment falls further, with jobs “hard to get,” contracting consumption will create the recession that so far refuses to appear. This is just scenario-building. We can build other stories in which falling inflation (only 0.4% in July, as forecast, against 1.1% in June) relieves pressure on the stagflation theory. In other words, growth counts, too.

Having bought into the correction theory, we are a little surprised at the weak tone of the euro. It’s not rising as the charts indicated it “should,” but at the same time, it’s not resuming the decline on bad GDP numbers, either. Actually ,we think the ECB’s intransigence is more noteworthy than the actual data. It is sticking to its anti-inflation rhetoric come hell or high water. Well, it’s getting high water right now and over the next 6 months, and should be punished by the market for failing to acknowledge that growth counts, too. And yet over the entire history of the ECB, the market mostly gives the ECB a pass for not adopting growth as a priority, only inflation.

It’s not normal for the euro to be trading sideways in such a narrow range. We have to expect a breakout—but right now it’s a 50-50 toss-up which way it will be.

Either direction is equally defensible.

Stay tuned.

Bye For Now

Barbara Rockefeller

For the Best Exchange Rates contact IMS Foreign Exchange

Wednesday, August 13, 2008

Oil is 50 cents from the 200-day moving average

The Sept NYMEX crude oil contract fell $1.44 to settle at $113.01, nearing the lowest low from May 1 and only 50 cents from the 200-day moving average.

This morning oil rose to $113.26 at 11:23 am GMT, hardly a big deal, but reported to be short-covering ahead of the US inventory report today.

Bloomberg says the Energy Dept will likely report a drop in gasoline stockpiles by 2.15 million barrels last week from 209.2 million barrels the week before. “Oil has slipped 23%from a record $147.27 on July 11. Prices are still 58% higher than a year earlier.”

bye for Now

Barbara Rockefeller

We will get a Correction in Euro to US Dollar

Foreign Exchange Currency Outlook : Retail sales today has the potential to damage the US dollar rally. Bloomberg says the consensus forecast is for a drop of 0.1% after a gain of 0.1% the previous month (with a wide forecast range of –1% to +0.6%. We say that if it’s a drop of 0.1%, that’s too small to draw any conclusions. Ex-autos, retail sales probably rose 0.5 percent, but that includes sales at gas stations. At the same time we get July import prices, probably a rise by 1%, pretty tame after 2.6% in June (on oil prices).

Just because data doesn’t support a gloomy deduction doesn’t mean Foreign Exchange traders won’t choose to do it anyway. In fact, if the US Dollar holds its ground on bad retail data, it’s a splendid sign the trend is, indeed, entrenched. Tomorrow we get eurozone GDP and expectations there are strong for a bad outcome -0.2%. It’s not hard to do the permutations and combinations to get the effect on the US Dollar. Good US retail sales + bad eurozone GDP = ongoing dollar rally (the current thinking). Bad retail sales + good eurozone GDP = corrective bounce up in the Euro to US Dollar. And so on. Other factors do exist, of course, including the price of oil, the process of yen carry trade unwinding, more news from the financial sector, and so on.

Unfortunately, factors don’t live in a vacuum. Some traders see a correction coming in oil prices since oil went up a bit and from this they deduce the US Dollar “should” fall.

To this we say poppycock.

Oil is moving down in a meaningful way and carrying other commodities with it. The WSJ has a hilarious story this morning about cotton—are speculators posing as hedgers driving the price up unreasonably beyond normal supply and demand? Gee.

Of course we will get a correction in euro to US dollar. Prices don’t move in straight lines. The round number 1.5000 is the new barrier—we had a level over it on Monday (1.6084) and now dollar bulls want to be sure it doesn’t get there again. That would mean that the upcoming correction would be in the sub 1.5000 area, and we can start talking about minor correction points like 1.4850.

We think that worries about eurozone growth will suffice, especially after the IFO confidence numbers today. And it’s also possible that the drop in Pound and Australian Dollars will be offset by the (temporary) rise in the Japanese Yen so that the US dollar is net even. That pulls additional new dollar bulls into the fray. We confess to being a little confused as to why the Canadian dollar is recovering, and let’s note that the Mexican peso rose on the day, but we can probably assume that these moves are due to local conditions and not necessarily sentiment toward the US dollar.

In fact, the worst thing on the charts today is gold breaking all kinds of important milestone levels including its own new downchannel. That means it’s oversold. In the sad way of the world, a rise in gold implies a drop in the dollar.

It would be too bad if an authentic US Dollar rally gets derailed because of something as dumb as a correction in gold.

Bye For Now

Barbara Rockefeller

For best exchange rates contact IMS Foreign Exchange

Tuesday, August 12, 2008

Not even war between Russia and Georgia - Stopped the Decline in Oil Prices

The Sept NYMEX crude oil contract hit a low of $112.72 and settled at $114.45, nearing the 200-day moving average at $111.78 and not all that far from the previous low $110.30 from May 1.

Not even war between Russia and Georgia, now halted but still on the map yesterday, stopped the decline.

Today the IEA said high prices are starting to affect demand and thus we have a “potential easing in fundamentals for the second half of 2008 and into 2009, before a renewed tightening thereafter.” Demand is now seen at 790,000 barrels a day, down from July’s estimate of 890,000 b/d, according to the FT. Demand decline is spotty—high in the US and Italy and Spain—but still rising in emerging markets like China.

The story fails to mention that these emerging market governments subsidize oil, and demand would fall equally hard if consumers had to pay the market price.

Emerging market demand is no different from mature economy demand—demand is demand.

Gold closed down at $821.50 (Aug contract). It is nearing critical levels that, if broken, foretell a bigger rout. Reuters reports that spot gold fell to an 8-month low of $801.90 from $819.25/820.85 late in New York on Monday. It is down over 20% from the record high of $1,030.80 on March 17.

Bye For Now

Rockefeller Treasury Services

Those who are expecting the US Dollar rally to end any minute are clinging to outdated prejudices.

Foreign Exchange Currency Outlook: We get some data on consumer behavior and sentiment today ahead of retail sales tomorrow, but the big release of the day is the trade deficit for June. It is expected to rise to $62 billion on the higher price of oil at the time, even though exports are booming. If it’s a deficit of $62 billion, it will be the highest in over a year. The forecast range from Bloomberg is $59 to $65.7 billion.

We say trade will not constitute an “event” this time. Traders are accustomed to the US running a huge deficit and huge deficits have lost the ability to shock. The deficit should be thoroughly priced in. The only caveat we have on trade is that if the rest of the world is going into a bigger slowdown than the US, the new conventional wisdom, US exports have to suffer—unless US exports are concentrated on the few spots where growth is not sagging, namely China, India, Brazil and a handful of other emerging markets.

We wrote a few weeks ago that the best of all possible worlds for the US Dollar would be bigger bad news from elsewhere than in the US, better US responsiveness to the liquidity crisis, and falling oil and commodity prices.

By some miracle, we did get all three.

After oil, probably the biggest sea-change is the outlook for the Euro.

We went from expecting two rate hikes this year only in early July to expecting none or even a cut in Q4 or Q1 next year—what a reversal!

As Market News writes, “Part of the reason for expecting a interest rate cut is a growing suspicion that the ECB may have underestimated the extent of the economic slowdown gripping the euro area, a notion given more weight today by ECB Executive Board member Lorenzo Bini-Smaghi. In an interview with Italian daily Il Messaggero, Bini-Smaghi offered some of the most dovish comments from an ECB member in many months. He said

the European economy is slowing more rapidly than foreseen, and at the same
time, inflation could begin to drop after the summer… Fighting against inflation, we can help relaunch growth.

What does that mean? Market News deduces that with Weber saying inflation will persist into 2009 but Bini-Smaghi thinking it could subside already this fall, the ECB policy committee faces a titanic battle between hawks and doves, and we shouldn’t expect Christmas cheer. But we wonder if it doesn’t mean the ECB is talking out of both sides of its mouth, again, as usual. It secretly wants a rate cut and has to see lower inflation and lower wage deals to justify it. The ECB, unlike the Fed, doesn’t cut to favor the financial sector-—but if credit is already contracting everywhere, it would be nice to cut rates to boost a little extra activity. Therefore, we smell a rising consensus that the ECB could be getting more dovish, and that’s euro dollar negative. A perceived bias toward lower rates adds to falling oil prices as a second leg for the US dollar. One more leg and we’ve got a stool.

Note: We made an error yesterday. We wrote that a 50% retracement of the 7-year dollar slide from October 31, 2000 at .8229 to the high of 1.6040 in July would be 1.3870. This is wrong. The right number is 1.2146. And note that a 25% retracement would be 1.4105. This is not a silly number, although we would have to expect such a big move to take several months.

Those who are expecting the US Dollar rally to end any minute are clinging to outdated prejudices. A correction must be expected, yes, but we say it’s a major new trend and we’re sticking to that story until something comes along to change it.

It would have to be something very ,very big, too.

Bye for Now

Barbara Rockefeller

For the Best Exchange Rates contact IMS Foreign Exchange

Monday, August 11, 2008

Pound to US Dollars heading to 1.7500?

Pounds to US Dollar Outlook is very bleak for a Technical Analysis Outlook.

It has been forming a major downtrend for a long time, and now it has broken the neckline of a head and shoulders pattern on the weekly chart. If you like point-and-figure charting, the downtrend has been visible since February. Market News reports that analysts at CIBC, no slouches at chart-reading, see sterling to $1.75/$1.76 and

"an overshoot towards the market base at $1.7050 cannot be ruled out."

Bye for Now

Barbara Rockefeller

For the Best Pound to US Dollar Exchange Rate contact IMS Foreign Exchange

what longer-term effect the Russian attacks on Georgia might have for energy markets

The Sept NYMEX crude oil contract made a new low and settled at $115.20 on Friday, down $4.70 on the day and the lowest since May 1. See the chart. After the Russia-Georgia story got more headlines over the weekend, it gained to a high of $116.90 overnight in electronic trading, and is quoted at $116.05 as of 11:17 am in London. We are inclined to think that, like currencies, oil is now being dominated by the technicals. Note that the 200-day moving average is $111.76. Adjusting for varying ways to measure the 200-day (ours is based on the Reuters continuous contract), we see $111-112 as the critical level. A breakout under there spells another big drop to (say) $80-85. As with currencies, though, we must expect and accept a corrective bounce upward.

This week could be when we get that, but keep the faith—once a bubble is burst, it tends to break hard.

Nobody knows what longer-term effect the Russian attacks on Georgia might have for energy markets.

Georgia doesn’t produce oil and gas itself but is the location of a major pipeline.

The FT reports that the “Baku-Tbilisi-Ceyhan (BTC) oil pipeline commissioned in 2006 has brought a new source of high-quality oil into the Mediterranean to compete with Russian supplies.” It transports 1 million bpd. A report late yesterday that the Russians had bombed the pipeline turned out not to be true. In any case, the price of oil barely budged on the story overnight, suggesting that it will not be a factor in the global price of oil and gas. One commodity expert said there might be an effect on the euro, since it’s Europe that takes the bulk of these exports.

But oil is a global market, oil being “fungible” (one barrel is pretty much the same as every other barrel).


Bloomberg reports that “Georgia is a key link in a U.S.-backed southern energy corridor that connects the Caspian Sea region with world markets, bypassing Russia. The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude, which is typically priced based on the Brent Oil contract… ‘Brent hasn't really narrowed to Nymex futures so it hasn't really affected supplies too much, but if there's a real prolonged disruption, then Brent may get a kick up…The European refinery maintenance season is also about to start so demand for crude may also drop,’” said an oil market analyst.

Meanwhile, the fire on the pipeline in eastern Turkey was put out and we will know the damage in the next day or so.

It has to cool down.

Bye for Now

Barbara Rockefeller

So how Low can the euro go?

Foreign Currency Exchange Outlook: Market prices of securities do not move in a straight line, of course, and some analysts are already talking about the dollar move as already over, or nearly so. Bloomberg reports that Foreign Exchange analysts at Barclays, Merrill Lynch and Morgan Stanley, among others, say we shouldn’t bet on any more US dollar gains.

This is because the economic situation doesn’t support a rising US dollar—big problems remain, like the trade and budget deficits.

To say the US dollar rally is over or nearly over is to fail to recognize the power of technical analysis.

Yes, fundamentals can always trump the technicals, especially unexpected fundamentals. The technicals serve to measure trader sentiment, which is mostly determined by the fundamentals. But as George Soros says, the technicals become a factor in their own right when a move is big enough. This is because cascading waves of the newly convinced keep joining the new move. After the first and second corrections, additional waves of the newly converted jump on the bandwagon.

We need corrections to bring in the new Foreign Exchange Traders. Corrections are bad only if your stops were set too close and you miss the second and third waves. The use of the word “wave” is descriptive and doesn’t suggest that we buy into any “wave” theories, Elliott or otherwise. But the price progression on the chart during a big move does look like waves and we are not willing to give up a perfectly good word just because some nutcase theorists are trying to grab it for their exclusive use.

So how Low can the euro go?

Estimates are all over the place. One idea is that the euro tends not to fall more than 2% under the 200-day moving average, which would cap the move at 1.4920. We say the sky is the limit.

How about 1.4366, the Jan 25 low?

The 50% retracement of the move from the Nov ’05 low to the July peak is about 1.3870. If the current move is a reflection of worsening conditions in Europe and the rest of the world while the US is already seeing recovery at the end of the tunnel, this is not a silly idea. Or to take things to an extreme, how about a 50% retracement of the 7-year dollar slide? It started October 31, 2000 at .8229. The high, as we know, was 1.6040 in July. A 50% retracement would be 1.3870. And why not?

We can afford to think big.

Bye For Now

Barbara Rockefeller - Rockefeller Treasury Services

For the Best Euro Exchange Rates contact IMS Foreign Exchange

Tuesday, August 5, 2008

US Dollar faces worst credit crisis since the Great Depression

Foreign Exchange Currency Outlook : The Fed statement will be released at the usual time of 2:15 pm ET today and we will all be glued to the radio or TV to hear it. Nobody expects a rate change but everyone wants to hear some perspective on how the Fed sees inflation. This is measured by how many members dissent and prefer a US Interest rate hike. Bloomberg writes that Bernanke may “need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade. The fastest inflation in 17 years adds to the risk that three members of the Federal Open Market Committee will dissent for the first time since 1992. Gary Stern, president of the Fed's Minneapolis bank, and the Philadelphia Fed's Charles Plosser joined Dallas's Richard Fisher since the last meeting in June in calling for an increase in rates to limit price increases. The trio wield more clout than usual because two seats assigned to Fed governors on the 12-member panel are currently vacant. That means Bernanke must craft a consensus that's responsive to the their inflation warnings while still heeding tumbling housing prices, a faltering economy and the worst credit crisis since the Great Depression.”

We agree that three dissents would be a lot and could be seen as a challenge to Bernanke’s authority. Remember, this was one of the main reasons that Paul Volcker resigned as chairman—he felt the Board should let him have the final say. We say this is almost certainly not a crisis in the making but it may roil the bond market. In the end, two dissents is probably what we will get and that will be digestible.

The recent economic numbers are not adding to clarity. The Q2 GDP version of PCE has a slight drop while the income/spending report version yesterday for the single month of June has a rise. Does the Fed see a contracting economy as a remedy for inflation? After all, there’s nothing it can do about the price of oil perniciously wending its way into consumer behavior. If the Fed thinks inflation is caused mostly by commodity prices increases that will iron themselves out (chiefly via reduced demand), then it has no incentive to raise rates. In fact, the Fed may be seeing incentives to cut, such as the desire to keep banks profitable and if not profitable, at least liquid and solvent. Thus a refusal to change rates can be viewed as hawkish.

While the Fed is the single most important institution in the world, let’s be honest and admit that the level of the US dollar exchange rate has nothing to do with monetary policy today and everything to do with the price of oil. Now that it has fallen under the old low from June, it’s wrong to say we cannot see a trend. Of course we can see a trend—we just need more confirmation of trendedness. The 10-day moving average is under the 20-day—there’s a confirmation of sorts. Better would be meeting the next historical lows ($110.30 from May 1 and $98.65 from March 20).

As an aside, those who favor alternative energy should be ruing the current downward trend in the price of oil—it removes incentives to find a fix, and fast. It also has the side-effect of reducing the political conflict between those favoring offshore drilling and those opposed. We say the knee-jerk “drill, drill, drill” of the tiresome Kudlow and his ilk is a dollar-negative. It’s far more dollar-positive for the US to be investing heavily in energy alternatives—it creates jobs and puts American innovativeness (and idealism) on parade as well as reducing stress on the environment.

In any case, we see the correlation of the US Dollar and oil as continuing. It’s very high, about 90% (depending on what timeframe you use). If we imagine that downward trending oil will get grabbed by the technical crowd, we can expect a retracement of the price rise by some pre-ordained amount, like 50%. Let’s say oil took off in Oct 2007 when it surpassed the old high from July 2006 at $78. A 50% retracement off the highest high of $143 is $112, and that is also near the bottom of the current upward sloping linear regression channel. It is therefore a perfectly reasonable forecast. (Note that $143 is the high for the current contract. At the time, the then-front month contract hit a high of $147.90 on July 11.)

It’s also only $7 away from the closing price yesterday, implying the move may be ending soon. In short, we would need to see oil go under the channel and under $100 to get a truly heavy-duty new trend instead of only a retracing trend. By this definition, we say we do indeed need to surpass the old low from March at $98 to be certain of a downtrend. But in the meanwhile, lower prices should be dollar-friendly in the extreme.

Conversely, if something evil happens and oil does a U-turn back to the recent highs,

the dollar will fall off a cliff.

Can it be that simple?

Yes.

Bye for Now

Barbara Rockefeller

For the Best Exchange Rate contact IMS Foreign Exchange

Monday, August 4, 2008

Australian and New Zealand Dollars

As an interesting tidbit, Market News reports that in Japan, the Tokyo Financial Exchange reports that margin traders have “defiantly bought the Australian and New Zealand Dollars despite expectations for interest rate cuts. They boosted their net kiwi long positions to 211,032 on Friday, the highest on records going back to mid-2006 and roughly doubling in less than two weeks. The New Zealand dollar rose 0.3% to ¥78.45…”

Well, if they have to unwind these trades, the yen would benefit across the board, so it’s a rocky outlook.

Bye For Now

Barbara Rockefeller

NYMEX crude oil contract settled at $125.10

The Sept NYMEX crude oil contract settled at $125.10, more than $1 over the close the day before, having made a higher high ($128.60) but not a lower low. This is a stall or pause rather than a reversal but everyone is watching the bar components like a hawk.

Oil rose to $126.35 in Asia overnight but the price is $125.11 at 11:18 am in London, according to Bloomberg, which doesn’t reflect the possibility of Tropical Storm Edouard turning into a hurricane, which it’s likely to do. This is a splendid instance of normally price-negative news being brushed off in a downtrend. But Galveston is battening down the hatches for landfall tomorrow.

And there’s another one forming in the Caribbean.

Commitment of Traders Report

Commitment of Traders Report: Market News reports that futures speculators capitulated and went long the US Dollar against both the euro and yen last week. In the euro, foreign exchange traders went from net long 4071 the week before to a net short by 16,218 as of last Tuesday July 29). “This compares to the April 29 net euro short of -21,315 futures contracts, which was the first speculative net euro short position since December 2005.” In the yen foreign exchange speculators were net long 10,524 the week before and lipped to net short by 6,280 contracts. They had been long the yen by a sizeable 50,105 contracts in the July 15 week.

cautiously optimistic about the US dollar rally

Foreign Currency Exchange Outlook

The July service sector ISM tomorrow is probably the biggest threat to the US dollar ahead of the Fed meeting—it will likely show a small gain (see the WSJ calendar below) but if it’s worse, the dollar could suffer. Services provide a very large chunk of GDP.

For some reason, not much weight is put on personal income and spending, but it perhaps should be. Incomes are expected down 0.2-0.3% after a rebate-fuelled 1.9% in June, with spending rising by about 0.5% (although Bloomberg says the forecast range includes a rise of 0.9%, which would be due to euphoria spilling over from the rebate checks). But as Peter Bernstein says in an opinion piece in the NY Times over the weekend, household earnings and spending are what we have to watch. The consumer is still the driver of the US economy.

If Bernstein writes it, we have to read it, and

if Bernstein is worried, we need to be worried, too.

As for the Fed even talking about rate hikes to tame inflation—forget it. The financial sector is on the edge of the cliff and the Fed feels responsible for not kicking it over. In fact, extending emergency funding plans to January could well be a hint that none of us are smart enough to take—no rate changes until after January, except perhaps an emergency cut. This should be a US Dollar negative but evidently foreign exchange traders give it low credibility. This shows only that they don’t know how banks work. At their core, banks take deposits and make loans (or invest in government paper). The spread is how they make money, and boy, do they need to restore earnings. It is in the Fed’s best interest to keep deposit rates low and asset rates higher, hence the desire for a steeper yield curve.

The sentiment is growing that everybody would really like to cut rates but nobody wants to be first. The ECB has painted itself into a corner with hawkish rhetoric, the Bank of England is at sixes and sevens, the BoJ has to contend with a stimulus package that almost certainly will fail, and the Fed would really rather do nothing for a while until the financial sector calms down—rate changes are only a distraction at this delicate moment.

That pretty much leaves the Reserve Bank of Australia and perhaps the Bank of Canada to take a leading role… the RBA is given only about a 30% chance of changing rates this time, but may make comments cementing the idea of a rate cut next time out. The rate cut idea is by no means universal yet, but we imagine it could gather momentum. Even if the ECB is not seen as being able to cut while inflation is so high, Trichet can decline to use the word “vigilance” or otherwise signal a more relaxed tone. If so, traders will sell euros as it gets another leg knocked out from under it.

We remain cautiously optimistic about the US dollar rally.

Bye For Now

Barbara Rockefeller

Friday, August 1, 2008

US Dollar Exchange Rate

Foreign Currency Exchange Outlook:

The drop in the price of oil, and let’s hope it keeps going to surpass the June low closing ($121.61), really gets most of the credit for the dollar’s rally. The codeword of the day is “demand destruction,” but realistically, Buyers of NYMEX Crude Futures (including exchange traded funds and other “investors”) must be pulling back. The question is at what point they decide that stocks and bonds are a pretty good place to invest over commodities. This becomes a technical issue as well as a simple arithmetic calculation of breakeven. At what prices did they get in? At a guess, about $80. Does that mean the price can go back there?

Why not, and further.

In second place behind the US Dollar rally is not-too-bad data from the US but fairly bad data from elsewhere, indicating trader bias is shifting. Normally when anti-dollar bias is strong, good news is brushed off and bad news is exaggerated. These days, bad news from elsewhere is getting more attention than usual. We like to think it’s because there is recognition somewhere in the back of the collective trader mind that when the US makes a move to adjust and adapt, it works a lot faster than elsewhere. Japan still has the mindset of the lost decade,” for example, and Europe has not even discussed a consumer stimulus initiative, while in the US, the bill was passed quickly and the money has already been spent. The problem comes in the form of “what have you done for me lately?” Markets demand on-going proof of responsiveness, even if little real progress gets made.

Payrolls this morning has the power to change everything, although it would have to be considerably worse than the drop by 65,000-75,000 now forecast to unhinge traders. If the number is at or near the consensus, we may not get the usual payrolls two-way spike—it could be a single spike, US dollar exchange rate up. Let’s say ADP Macro is right and it’s a gain, not a loss—zowie, get out of the way. The dollar could make it to important technical hurdle levels like 1.5350, even if it doesn’t close there.

Don’t count on it, of course.

Longer term, we must expect manufacturing to contract today (PMI expected down to 49 from 50.2) and let’s also keep an eye on the prospect of a Fed rate hike. Market News reports that one estimate has it that the odds of a rate hike in Sept are down to 16% from 40% only on Wednesday. The Fed is simply unwilling to prod the economy when it’s slowing down. While we may assume that the ECB is not feeling as hawkish as it would like to feel, the probability is higher than in the US that a hike could be in store, or that a cut would be more delayed. The relative rates do count. That’s why we name it “the main event.” If US yields are falling, it takes a continuous drop in oil to offset. This makes the dollar rally a shaky and precarious one that can turn around at any time. A currency needs more support than a single commodity price!

So while we welcome the dollar rally, we remain suspicious of its durability.

Let’s get back under 1.5250 first.

If that happens, then the whole picture shifts, like the picture that is sometimes a vase and sometimes a lady in profile.

Bye for Now

Barbara Rockefeller