falling euro simply good for exports

Foreign Exchange Currency Outlook : The dominant factor remains the price of oil, although everyone is holding his breath to hear what the Saudis have to say ahead of the OPEC meeting next week. It does not benefit oil producers to send their customers into recession, which obviously just cuts demand, and this is something the Saudis constantly remind its fellow producers.

The other big factor is the relative weakness emerging in other economies compared to the relative resilience of the US economy. Canada and Australia, for example, are under pressure in part because of commodity price declines but also a perceived global slowdown (and the two are related). Today Australia reported Q2 GDP up only 0.3% after 0.7% in Q1, a tad under forecast if still a respectable 2.7% y/y. The data has no meaning in its own right-it’s the interpretation that counts. Currency Analysts said it’s the slowest growth in three years, so let’s Sell the Australian Dollar. We saw the same thing with pound sterling, where the CIPS PMI registered an improvement but the number is still under the boom/bust line of 50, so it must be “bad.”

Context is everything.

We could be in for a Shock tomorrow when Mr. Trichet gives his press conference after the ECB -policy meeting. In addition to remarks from Steinbrueck and Juncker, the Dutch central bank stability review today probably gives the consensus outlook, as Market News reports, “Inflationary pressures limit the ability of major central banks to respond with monetary policy to slowing economic growth…” The ability of central banks to respond to economic cooling is limited. It’s also unusual to have slower economic growth accompanied by higher inflation—it’s not the normal cyclical pattern. Let’s blame emerging markets for goosing commodity demand when they themselves have inelastic supply (what a smart observation).
We don’t know whether Trichet will use the important word “vigilant” but it probably doesn’t matter. We expect him to sound hawkish, whatever the choice of words, and that is going to upset some market players, who erroneously think that one quarter of negative growth is going to get the ECB to cut rates. We are 90% certain it will not. We could easily see a foreign exchange traders buy euros if Trichet sounds particularly exasperated as forecasts of rate cuts when he has gone to so much trouble to signal the market that their expectations are wrong.

But having issued that warning, the technical currency traders are out in force. As each milestone gets passed, whether a Fibonacci number or previous low or whatever, additional players throw in the towel on the US dollar-negative stance and embrace the dollar rising story. We have no trouble at all seeing the Jan low of 1.4365 getting broken, whereupon everyone will start talking about the psychologically important round number 1.4000. It may not be a straight-line move, but it seems unlikely that even Trichet can derail it now—now would he want to. Europe has gone past the point of wanting an ever-higher euro for the sake of credibility and more pragmatically today sees a falling euro as simply good for exports, even more inflationary than they would like.

Bye For Now

Barbara Rockefeller

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