The Big Event, however, is the ECB rate decision on Thursday.

Foreign Exchange Outlook : We get a ton of data this week, as usual for the second week of the month. The Big Event, however, is the ECB rate decision on Thursday. So far the ECB has been reluctant to acknowledge the extent of the likely downturn, let alone the vastly deflationary forces at work. It has also put forward a face of "we know better" that is starting to look less convincing with every data release. Logically, there is no way Europe can avoid contamination from the US and UK, as Ireland just found out with the withdrawal of Dell and its several thousand jobs, or German manufactuers of industrial equipment suddenly seeing Chinese orders fall off the cliff due to demand destruction in the US.

We normally get an odd pattern of currency market responses to upcoming rate changes, as we just saw with the UK pound and the BoE decision. Often a currency rises ahead of the decision, which is counter-intuitive, and doesn't fall until afterwards. This time it looks like the euro exchange rate is going to fall, perhaps overly so, ahead of the decision (suggesting it might rise on the Event itself). The ECB has nobody to blame but itself. As BoT-Mitsubishi analyst Halpenny says in the FT today, "We maintain that the financial markets remain much too optimistic over the ability of the eurozone authorities to manage the current downturn. Lack of coordination on fiscal policy and evidence of strains within the EMU will undermine the euro exchange rates."

Merrill Lynch says the forex traders would buy euros if the ECB decision not to cut rates but it would be short-lived. We say "short-lived" is a euphemism - it would last all of ten seconds. In other words, the euro rate is going to fall no matter what the ECB does. It is in a no-win situation, unless you consider that a falling currency is desirable (which of course it is, today).

As for the economic claendar, it’s enormous--the Nov trade deficit tomorrow and the TICS report on Friday. We also get retail sales, the Beige Book, the Empire State and Philadelphia Fed indices, Dec CPI and industrial production, and the University of Michigan consumer sentiment for Jan. We also get the Federal budget deficit and the World Economic Forum's Global Risk report for 2009. Stock market guru Sandi Lynn adds that the U.K. ban on short selling financials ends this week, too.

Sometimes of more importance than the data is the rhetoric. This week we get Feds Lockhart, Bernanke and Lacker along with Congressional hearings on Obama’s cabinet nominees. We say the public and markets are still in a state of shock over the developments since last March when Bear Stearns lost its way and September when Lehman was allowed to go under. Goldman Sachs chief economist O’Neill says the Goldman financial distress index is actually a bit better, mostly on activist policy proposals, but with fresh bad news sure to be coming, this is probably the calm before the storm. Such a perspective is also a dollar - favorable perspective ( buy us dollars), since severe distress is dollar-favorable on the safe-haven thesis.

Bye For Now

Barbara Rockefeller

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