Australia and New Zealand Dollar, the prospect of rate cuts is currency-negative this time.

Foreign Exchange Outlook : As we have been emphasizing, one major reason for the US dollars firmness during this crisis is "it's worse elsewhere," making the dollar a safe haven. The news from the UK is particularly dire. The Reserve Bank of Australia, Bank of England and ECB are all expected to cut interest rates this week, a move that traditionally weakens a currency but recently has been seen as a good thing because it may unclog the credit pipes and also demonstrates responsiveness. With central banks wagging an admonitory finger on credit quality behind the scenes, it’s not clear that lower rates have their accustomed power to goose lending and activity, though.

Still, in Australia (and New Zealand), the prospect of rate cuts is currency-negative this time. After a tame inflation report in Australia, the Australian Dollar fell on the widening view that the RBA could cut as much as 75 bp to 4.5% at the policy meeting tomorrow. Curiously, the Australian stock market fell on the rate cut outlook.

Aggressive rate-cutting around the world may be a dollar exchange rate supportive factor-or may not. A lot depends on the rhetoric. Too much fear and panic expressed out loud by central banks is good for the US dollar rate, while too smug a view (by, for example, the ECB) is also good because it shows a lack of responsiveness. In short, central banks have to perform a real balancing act. The appearance of desperation is also dollar friendly via the oil and other commodity price connection. We continue to think the oil - dollar correlation is more important than any other intermarket analysis.

In the US, we get a ton of data this week, including the ISM's manufacturing sector data for Nov and a Bernanke speech today, plus the usual barn-burner, the payrolls report on Friday. The ISM report is likely to show a contraction in manufacturing for the 4th month in November, perhaps to the lowest in 28 years, according to Bloomberg. This is bad for the economy and for confidence but very nice for the price of oil resuming its downtrend.

Most of the factors are lining up for a dollar rally today and perhaps all week. We worry a little that normally dollar exchange rate negative factors are being ignored, thought. Any development along those lines (terrorism, China, payrolls) could cause a confusing halt in the run.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790