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

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