We wouldn’t touch a new Foreign Exchange position with a bargepole

Foreign Exchange Outlook : Politics is playing a big but unmeasurable part in the FIFO recovery scenario that underlies the US Dollar recovery story. The NKS writes today that "Expectations for the measures had prompted massive US dollar buying in recent trading on hopes for a U.S. economic upswing." Really? Outside of Japan, we have not seen many foreign exchange trader interviews focusing on the Obama Effect.

We still think it's the US secret weapon and the world has not yet acknowledged it. One reason for this is the "empty suit" argument. Let's say we get new infrastructure spending and get it faster than now expected. Two points remain in question. Will the roads and bridges be well-built and without cost overruns? History is not sanguine on this one. And how is the newly unemployed 55-year old office worker going to benefit from shovel-wielding jobs that he himself can't get or take? Obama's big plans, which we will hear about today, are already being questioned. It’s one thing for insiders to say he is a pragmatic guy. It’s another to fight a tsunami with a pickaxe. It’s simply not clear that all the tools at the disposal of the US government are sufficient to get the job done. This is a confidence issue and it requires a continuous diet of rhetoric. If the stock market responds favorably today to the Obama speech, we have a prayer.

All the same, the new data from Germany - industrial orders down over 25% y/y - makes the point that "it's worse elsewhere." Yes, Germany is taking new initiatives, but is it fair to assume Germany can pull all of Europe up by itself? Employment is slower to drop in Europe than in the US, but the manufacturing sector is clearly going to contract, raising unemployment again. This has a domino effect throughout Europe. We have to ask whether the "conditions worse elsewhere" factor is going to take the heat off the US dollar exchange rate response to the payrolls report tomorrow. Now that we have had a shockingly high number from ADP, does a better actual number produce a relief rally-or what? Foreign Exchange Analysts say there are serious methodological problems and differences between the ADP and BLS statistics. This is really, really annoying, not least because payrolls is such an important number in evaluating the depth of the downturn and also because of the currency market effect.

We’d like to see the euro exchange rate dip back under 1.3500 today going into the report tomorrow. We have to be prepared for a jump to 1.3800, though. Conditions are wild. We can hardly remember the last time conditions were this uncertain and vulnerable to a new black swan. We wouldn't touch a new Foreign Exchange position with a bargepole. We issue buy/sell signals because you pay us to have an opinion, but realistically, the odds are only 50-50 these days of getting anything right. The wise course is to stand aside and wait, even at the risk of an opportunity loss. If you are not convinced that the market is wildly irrational today, take another look at sterling.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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