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

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