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