Net-net, the US dollar Rate is at or near a turning point. It seems to be holding ground against the euro, pound and yen

Foreign Exchange Outlook : We get the US service sector PMI this morning, probably a drop to 47 from 50.2 in Sept for the 6th drop in 10 months, according to Bloomberg. We say the big picture will dominate today rather than data confirming the US slowdown. The big picture includes the reception of the US Treasury refunding, political things like Obama’s choice of TreasSec and/or intentions to propose a stimulus plan right away, and the new perspective on rate cuts.

Rate cuts first: The Australian dollar was rewarded with a rise after the Reserve Bank of Australia cut by more than expected. This is the opposite of the usual response under normal conditions. Commentary from the UK indicates that a larger-than-expected rate cut by the Bank of England tomorrow, even as much as 100 bp, would be sterling-favorable because it shows the government to be "pro-active." The market has priced in a 50 bp cut, but of 60 economists surveyed by Blomberg, 8 expect 100 bp and 6 expect 75 bp. A UBS analyst writes “In times of economic stress markets may become more concerned by future growth rates as a driver of future returns than movements in cash rates.”

Evidently a global recession/possible Depression is sufficiently well-appreciated that rate cuts are seen as foreign currency supportive.

Might the same thing happen to the euro exchange rate tomorrow, and might the market be expecting just that response? Yes. Also, the following day we get the US payrolls report, expected to be bad but perhaps not fully priced in yet. We think the euro downtrend looks safe, but on the intermediate chart (360 minutes), the euro exchange rate is pressing against the linreg channel top and we need to see a level under the last intermediate low (1.2523) to feel confident. It’s not unheard of for a currency to move that much in two days, especially given the wild swings lately. In fact, the current average daily true range is 158 points, so over two days we could easily reach 1.2500. But everything has to go right for the us dollar to achieve the 1.2500 level before the mud hits the fan early Friday morning in the form of payrolls.

The Obama Effect: We may not hear before then of any Obama stimulus plan in the remaining months of the current Congress. (Congress remains out for another two weeks but technically has two months after that). The Obama plan is probably a $175 billion package including outright subsidy checks to consumers (which didn’t work all that well in April), a tax credit for job creation, and a big public works initiative - roads, bridges and schools.

Should we be worried that an Obama plan will also contain Hooverish measures against free trade or reactionary unionism? Probably not.

His advisors include former Fed chair Volcker, former TreasSec Summers, Warren Buffett, George Soros, and former TreasSec Rubin, who has said Obama understands that any government, especially one proposing big spending, needs to announce a commitment to long-term fiscal discipline. Failure to do so undermines the bond market and the dollar exchange rate. This was Rubin’s stance in the Clinton administration and he was right. As far as we know, Obama takes expert advice like this.

A funny monkey wrench is the works is the upcoming (Nov 15) summit of G20 in Washington, proposed by French Pres Sarkozy and hijacked by Bush. We expect nothing to come out of this meeting but hot air.

Net-net, the US dollar Rate is at or near a turning point. It seems to be holding ground against the euro, pound and yen, but not against the "riskier" currencies Australian Dollars and Canadian Dollars. If hope rises of a US recovery via Obama or anything else, the Australian Dollars and Canadian Dollars upswings will continue as risk appetite comes roaring back.

Does this lead the others?

Possible.

Ironically, the prospect of recovery in the US can be US dollar negative.

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Barbara Rockefeller
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