commodity price bust is going to keep going, and so will the stock market decline, and these moves will not be orderly

Foreign Exchange Outlook : Analysis of the day’s rate cuts will occupy most of the morning today, but by midday foreign exchange traders will probably turn their attention to the payrolls report at 8:30 am tomorrow. Yesterday ADP forecast the private sector component at a loss of 250,000 and other estimates are all over the place, with some whisper numbers as high as 400,000.

The problem will assuming that a really bad number tomorrow will be dollar exchange rate negative is that it’s already built in - isn’t it? Usually we get a two-way spike, both down and up, on the release. Payrolls is the most unforecastable of all the economic numbers, and so has become the most important. It’s not clear that the Fed views it as the most important, but never mind. This time we already know the news is going to be bad, and revisions will probably be worse. Depending on what happens to the automakers, it could get a lot worse before it starts getting better.

We are guessing that a bad payrolls number might have a US dollar rate -negative effect in the US dollar to Japanese yen exchange rate but not elsewhere. After all, falling employment is “good” in that it means the race to the bottom is proceeding at a rapid pace in the US, while it lags everywhere else. This is the FIFO argument from a few weeks ago (first-in, first-out) and while there’s a lot wrong with this idea, it can have a powerful grip on traders’ imaginations. Foreign Exchange Traders always try to anticipate. Obama has said employment is key and recovery plans will aim to create millions of jobs. So far we believe him.

Not getting enough attention is the report from the Government Accountability Office, which said on Tuesday "There is heightened risk that the interests of the government and taxpayers may not be adequately protected and that the program objectives may not be achieved in an efficient and effective manner." In other words, the Treasury has been throwing money out of windows, perhaps more than $3 trillion so far and easily another trillion or two to go, without being able to pin down exactly who got it and why. Someday the US dollar rate is going to fall on the blazingly obvious incompetence and mismanagement of this ad hoc rescue effort.

But we also think the commodity price bust is going to keep going, and so will the stock market decline, and these moves will not be orderly. Fear of volatility alone may suffice to support the US dollar exchange rate. Dollar bulls do not want to see commodity prices and stocks to rise, which is surely a bad thing in its own right.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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