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

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