We wonder if confidence in the UK government is coming back

Foreign Exchange - Currency Outlook

The US Dollar Exchange Rates made a solid gain yesterday against the euro and this spilled over to other currencies as well. The euro rate made an overnight high at 1.2900 but failed to hold it, sinking to 1.2688 by mid-morning in New York. The euro has flopped around since then and risen to just over 1.2800 by 8 am today, but despite choppiness in a wide range, the euro exchange rate is on the defensive now. We need the euro to fall under the twice-hit 1.2680 area to confirm the downtrend. If we get it, the next move would be a test of last Friday’s low at 1.2555. With the ECB expected to cut rates next week, this may seem a no-brainer but nothing is ever a no-brainer in such a nerve-ridden market.

The dollar vs japanese yen is the highest since last November, breaching the round number 98 for a few minutes overnight. Bloomberg says gloom about another lost decade is rising, with fear over tomorrow’s unemployment and CPI data. Some foreign exchange analysts note an area of resistance at 98.90, which is the 50% retracement of the dollar drop from last Aug (110.66) to the Jan low of 87.13. We say it's an obvious target but with conditions in Japan worsening by the minute, why stop there?

A level of 110 can easily be imagined.

Pound Sterling closed lower on the day yesterday, making a big jump down from 1.4663 on Monday to 1.4171 on Wednesday during US hours, but is recovering a bit this morning on what Market News says is demand from a macro hedge fund. We wonder if confidence in the UK government is coming back, too. It just announced a very big and complex rescue plan for RBS that involves everything but the kitchen sink - capital injections, a bad bank, insurance, and on the side, a BoE commitment to quantitative easing, which can entail buying some of RBS’ toxic paper as well as others’.

Pounds to US Dollars = 1.4313
Pounds to Euros = 1.1219
Euro to Pounds = 0.8906
Pounds to Australian Dollars = 2.1901

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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zombie banks

Foreign Exchange - Currency Outlook

Bernanke speaks again today, and because he was influential yesterday, will get more attention this time despite the content of his remarks identical. Bernanke disapproves of the phrase "zombie banks" (which we think was invented by former FDIC chief Seidman, who still appears on Kudlow’s TV show). He will also reiterate that nationalization simply isn’t necessary - every bank can be managed somehow. To some extent, this is semantics. The government already has an ownership stake and it’s silly to equate what the US government is doing today or may do in the near future with the kind of nationalization that despots have carried out in the past - oil companies in Mexico and Venezuela, banks in France, and so on. There is clearly no intent to have Chris Dodd (say) dictate banking practice, even if he can limit compensation. Kudlow’s gang doesn’t doubt Bernanke’s sincerity but thinks he will turn out to be wrong later on.

Gee, do they have access to the vast amount of information the Fed has?

All of this talk of nationalization and the ideological divide it reveals is important because of its effect on public perception and investor expectations. As Keynes said, investor expectations have a decisive effect on investment decisions and the resulting interplay with the premium or discount on the rate at which investments get made. At this moment, everyone is in hoarding mode, from the consumer to the tycoon.

Gridlock is the appropriate word, and so is fear.

Again we feel that all the bad news is not out and nearly every instance of upcoming bad news is US dollar exchange rate - supportive, whether it's sovereign downgrades, the effect of Eastern European defaults on the Western European banking system, a shock from AIG, or something we haven’t imagined yet. Even delay by the US Treasury is vaguely US dollar - supportive. The one thing that is not dollar supportive is a rise in oil that, if sustained, implies faith in economic recovery. Good for the US ,bad for the dollar. What strange times we live in. We believe in trends and think the euro downtrend is real and will be sustained, but there is still a real possibility the foreign exchange market decides it doesn’t need a safe haven because the US will lead the world put of recession.

Pounds to US Dollars = 1.4207
Pounds to Euros = 1.1150
Euro to Pounds = 0.8960
Pounds to Australian Dollars = 2.1950

Bye For Now

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

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Buying Dollars? Buy US Dollars at the Best Dollar Rates!
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Contact IMS Foreign Exchange + 44 207 183 2790

The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization

Foreign Exchange - Currency Outlook

The big question on the table today is "Where is Tim?" Geithner is disappointing the market by not disclosing details of the plan to lend money to the private sector (vultures) to make a market in toxic assets. It looks like he is part of the problem rather than part of the solution, and critics are calling him an empty suit who has never placed a trade himself.

This is a terrible thing.

Remember that Rubin had instant credibility on the Street because he had been a trader.

The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization (a semantically loaded word), and most of all, it avoids the government putting a price on assets at taxpayer expense. So where is it? Market News says "The market is anxiously awaiting the Fed's rollout of its Term Asset Backed Lending Facility (TALF) which has the potential to lend up to $1 trillion against assets and loans to spur lending in autos, credit cards, student and small business loans and commercial mortgage backeds. Bernanke said last week the facility should open any day."

When the history of this period gets written, we will find out the cause of the delay, but right now, nobody cares. If it turns out to be a legal constraint, the Street will issue the Shakespearean scream "let's kill all the lawyers." And yet it really is preferable to resolve these problems without writing new laws or twisting the capitalist principles on which the country is (more or less) founded. This is why letting judges arbitrarily re-set the principal of mortgages is such a contentious idea. We need flexibility and adaptability, yes, and fortunately laws can be amended, but delay is a bad thing in its own right, at least if you are a saver/investor today.

It's likely that Geithner is side-tracked by the Citigroup problem. Citi, along with about 20 other banks, is supposed to undergo the stress test this week. Presumably it will fail, despite big downsizing actions already taken. Converting the government’s preferred shares to common stock would solve some capital adequacy issues (while creating massive moral hazard and a competitive advantage for Citi).

The other question of the day is "What will Ben say?" Bernanke starts the semi-annual Congressional testimony today. He wants to talk about the economy but is going to get button-holed on bank nationalization whether he likes it or not. Congressmen will have their usual opportunity to look stupid and partisan on TV, although Bernanke is more gentle than Greenspan used to be. The real question, although it's conceivable no one asks it, is what is the Fed’s exit strategy, i.e., how will it halt inflation after all that Fed-created money at the banks is no longer used for capital and is used for lending? The obvious answer is to pull a Volcker—to raise interest rates so high that lending is choked off. This is obviously a long way in the future, probably years, but it's important for the inflation - obsession crowd that Bernanke acknowledge this is the expected outcome and assert that he will deal with it. After all, expectations of future inflation from money supply creation is why a Chinese official said

"We hate you."


Some foreign exchange analysts want Bernanke to state out loud that the Fed will adopt an inflation target. This would supposedly reduce fear of upcoming inflation and add confidence that the Fed knows what it’s doing by ballooning its balance sheet. But we say inflation targeting is still too hot a potato and Bernanke will be cagey about it. The downside among politicians outweighs the upside among market players.

Institututional factors tend to trump economic data and this is a huge week for institutional factors. The fiscal responsbility summit that kicked off yesterday - with Obama promising honesty in government accounting plus efforts to reduce the deficit - and meetings go on all week. This is probably an effort to woo those idiotic Republicans who want basically to secede from the rest of the US (with some governors rejecting federal unemployment money for its citizens - good luck in the next election). Tonight Obama will pre-empt our regular TV shows with an address to Congress and the nation on the budget, which is formally released on Thursday. Tomorrow the banks’ stress tests begin. The White House is no doubt hoping to get through the week to Friday’s GDP revision without having to nationalize anything.

Finally, we do get data although probably no heavy surprises. Today it's the Case Shiller home price index, backward looking to December, and Thursday, durables. We suspect the dolar could ping-pong around and perhaps weaken today if stocks recover, but looking ahead, the ECB will be cutting rates next week and we have to ask whether that is fully built in.

The trend is your friend and the foreign exchange traders continue to sell euros and buy US dollars and trend remains downward.

Pounds to US Dollars = 1.4417
Pounds to Euros = 1.1260
Euro to Pounds = 0.8870
Pounds to Australian Dollars = 2.2330

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!
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Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

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the public is in no mood to bail out Citibank and its rich shareholders.

Foreign Exchange - Currency Outlook

The financial crisis is made worse - prolonged - by the talk of US bank nationalization if nationalization is not a real possibility today, and we say it's not. It’s just smoke. On one side we have a bank that wants to protect important foreign shareholders and on the other we have a wide array of interests that want to protect the US reputation as a capitalist country that believes in private property ownership. Nationalization was always a last-ditch prospect and we are not at the last ditch, although with its stock at $2,

Citi thinks it is.

But the Geithner plan, which relies on lending government money to vulture speculators to make a market in toxic paper, is actually a good one. It’s a market solution only a little contaminated by government interference. The Paulson plan (the first version of TARP) was to buy toxic assets to free up the capital to let the banks operate properly again.

Paulson had to draw back from that plan because he had not appreciated the sheer size of the questionable paper. But the questionable paper remains at the heart of the financial crisis and the Geithner plan does address that, while simultaneously addressing bank capital levels and protecting taxpayer interests. The government is not setting the price on toxic assets, as TARP would have done. The Geithner plan is the one viable alternative to the "bad bank" plan that was rejected by the Obama Administration.

To nationalize Citigroup (which contains a lot more than Citibank) would be to throw a monkey wrench into the Geithner works. Not only would it destroy the credibility of the Treasury, it would create suspicion that more nationalization is to come - the famous "slippery slope" of the lawyers. And it almost certainly would entail creation of a mini-bad bank, an idea already rejected by the Administration and Congress as too expensive and involving too much government interference in markets (price-setting). So, what leverage might Citi have to get it done anyway?

This story has a way to go to ripen and it’s always possible that Citigroup gets broken up with a heavy dose of government money that is not quite nationalization (which would be majority ownership and management duties). But we have no reason not to believe Obama and Congressional leadership, including the hilarious Barney Franks, when they say this is not the road they intend to go down. It’s not insignificant that before the nationalization story got going, the story on Friday morning was Rick Santelli’s rant on CNBC the day before that the Obama mortgage bailout plan was rewarding the bad behavior of people who bought more house than they could afford and took on more debt than they could afford to buy luxuries. This got a large and favorable response, except for the rebuke from the Obama spokesman, who said Santelli didn’t understand the mortgage plan and didn't know what he was talking about. The favorable response is the voice of the people, who are mad as hell at bankers as well as their irresponsible neighbors. It’s not unrelated that disapproval is running really high over the woman who deliverately set out to have octuplets (while already having 6 children), which is seen as irresponsible (at best).

In this social environment, the public is in no mood to bail out Citibank and its rich shareholders.

All this story has done is distract attention away from the plight of the debtors in Eastern Europe, including a vast number of Poles and Hungarians with mortgages denominated in Swiss francs.

The nationalziation story is going to hold imaginations until something else comes along. Tomorrow and Wednesday, Bernanke gives the usual twice-yearly testimony to Congress on the state of the economy. He is likely to say what the Fed has been saying recently, that even if the financial sectors starts loosening up credit and seeing signs of recovery by year-end, it will still be a jobless recovery, the third jobless recovery since 1991. The Fed thinks unemployment will not fall under 7% until 2011 or later. Bloomberg reminds us that the 1991 recession bottomed in March but unemployment kept rising for another 15 months, reaching 7.8% in June 1992. “Similarly, the last recession ended in November 2001, and unemployment didn’t peak until reaching 6.3% in June 2003.” We seem to recall Greenspan excusing away the jobless recoveries as being due to improved productivity.

Another factor this week will be the "fiscal responsibility summit" tomorrow, at which Obama will announce more details of the plan to cut the budget deficit by the end of his first term to $533 billion, from the $1.3 trillion he inherited from Bush. The $533 would be about 3% of GDP - the Europeans will say the US is imitating them. Actually, the amount inherited is much larger because the Bush gang left out various chunks of spending that they didn't want to acknowledge, like the cost of the Iraq war. We get the actual budget details on Thursday (the same day we get new home sales). Signs of fiscal rectitude and honesty in the US "should" be US dollar -friendly.

Meanwhile, the March 5 ECB policy meeting creeps ever closer, and it's a surefire bet that the bank cuts rates, probably by 50 bp. We may also speculate that somewhere in the EC or ECB a plan is being hatched to buy the sovereign debt of troubled members like Portugal, Spain, Greece, Italy, and Ireland.

Maybe

Europe will come up with the equivalent of a plunge protection team, i.e., private players getting their arms twisted to buy this paper and reduce the spread against Bunds. Nobody seems to have noticed that Trichet, as of this morning, is changing his tune and is worried about the spillover economic effects of the financial crisis.

We call this a day late and a dollar short.

We get a lot of data this week, probably to be overshadowed by the Citi nationalization and Obama budget talk. Nothing will be much of a surprise, except possibly Friday's GDP revision from -3.8% in Q4 to possibly as much as -5.3%. Everyone is already thoroughly disheartened so it’s not clear that a downward revision is going to hurt much. Before then we get the Conference Board consumer confidence (tomorrow), existing home sales on Wednesday and new home sales on Thursday, and the University of Michigan consumer confidence on Friday. Also Thursday is Jan durables, probably the one other data point that can move the market this week.

We continue to like the dollar.

Watch gold - it’s not really a currency and its limitations are clear to even the most ideological of true believers. Secretary of State Clinton told the Chinese she wants them to keep buying dollars and dollar paper. So far we have no reason to think they will not, and you should, too. It is the safe-haven. Unless the stock markets rallies like crazy this week - and why would it do that? - the US dollar should recover smartly.

Pounds to US Dollars = 1.4619
Pounds to Euros = 1.1400
Euro to Pounds = 0.8765
Pounds to Australian Dollars = 2.2600

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!
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OECD reports that all of its 30 members are officially in recession

Foreign Exchange - Currency Outlook

Contraction is the order of the day and it’s about time everyone acknowledges it instead of engaging in denial and wishful thinking. The OECD reports that all of its 30 members are officially in recession with two consecutive quarters of contract, a combined -1.5% q/q and -1.1% y/y in Q4. It’s the biggest quarter-to-quarter contraction since the OECD began keeping records in 1960.

Outside the developed countries of the OECD, conditions are worse and worsening fast. Russia admits it will get contraction of 2.2% and the ruble hit a new low yesterday. Recently China said unemployment is 20 million persons, more than the entire population of some countries. The Eastern European countries are talking about defending their crashing currencies, with Poland knocking on the EMU door but honestly not qualifying (the Polish zloty has fallen 19% already vs. a rule of no more than 15% variation in the two years leading up to membership). In the real basket-case of Zimbabwe, where banknotes of face value in the billions, the currency was abandoned in favor of the dollar.

We guess that while it’s noble and useful for the Germans to step up to the plate and try to defend the eurozone members that need fiscal help, the market is missing the point when it buys euros on the story - the real meaning is that the eurozone is on shaky legs and members NEED help. The structural shortcomings of the European economy have resulted in big premiums for some members’ debt over the benchmark German Bund, as the BBK acknowledges. This shouldn’t happen if the market really believes that the union itself is a safekeeping device against performance divergence. But it’s not. The lack of a union-wide fiscal capability is fatal, or might be.

Everyone said the eurozone would get its first real test when a giant recession came along, and here it is.

It’s actually pretty silly to buy euros when a eurzone-crisis is finally being ackknowledged!

We think the dollar exchange rate will recover from this correction, which was always going to happen after the big move. We happened to get a good story this time but there’s always a story that foreign exchange traders use as an excuse to form a correction. We will not get too worried unless the euro puts in a true breakout, like 1.3000. Note the round number.

Pounds to US Dollars = 1.4340
Pounds to Euros = 1.1275
Euro to Pounds = 0.8865
Pounds to Australian Dollars = 2.2100

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

investing in emerging markets or trading emerging market currencies

Foreign Exchange - Currency Outlook

We keep getting letters from readers asking whether we like investing in emerging markets or trading emerging market currencies, among other questions. Supposedly there are no dumb questions, just dumb people who don’t know enough to ask the question in the first place, but we are starting to get worried that most people still don’t get it.

The ten D's are accurate. We are all about to get poorer. Demand destruction, deleveraging and downsizing are going to hit even the richest, who will be less rich after all the boom-time frauds are disclosed. If Japan has falling steel output by nearly 40% in a single year and failing/contracting auto companies, how can anyone imagine that a developing country can do better? If the big economies of the West, notably the US and Germany, have failing banks, how can anyone think that banks in emerging markets are going to do better? And banks are the centerpeice of a thriving economy.

No banks, or disabled banks—no economy.

This is what's wrong with the new US government plans. We are worrying about preventing new mortgage defaults and saving GM, but the real problem is in the banking sector, and where is Mr. Geithner’s Plan? The real risk to the world economy is that the US doesn’t get it right in fixing the banking sector. It doesn’t matter what unemployment becomes in China or how far construction falls in Germany if the US doesn’t fix its banking sector. Like it or not, this is the key driver of the world economy. No functioning US banking sector, no world economy. This is the sense in which Mr. Greenspan is, alas, correct - the US is not focussing on the right problem. But Mr. Albertson is also right - we need to acknoweldge that we will all be a lot poorer when this is over in three years, or five. Europeans' talk of the crisis ending this year is a pipedream -and the euro exchange rate will suffer for it.

Pounds to US Dollars = 1.4287
Pounds to Euros = 1.1330
Euro to Pounds = 0.8817
Pounds to Australian Dollars = 2.2390

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

Consider US investors with positions in European stocks or funds that hold banks.

Foreign Exchange - Currency Outlook


The US Dollar has plenty of its own bad news - Detroit, the insufficiency of the stimulus and upcoming mortgage plans, and Congressional nastiness - but "it’s worse elswhere." We have been preaching about the impending financial sector crisis in Europe from the beginning, albeit without much hard data. There is just no way that Citibank, BoA and the other powerhouses of finance could have gotten themselves in so much hot water while their European counterparts escaped. Giant hidden losses at European banks were always the only logical deduction. At the moment, Eastern Europe is the subprime of European banking, but at a guess, there are other sinkholes, too. And the ECB is keeping it all under wraps.

At 8 am today, we got the Wal-Mart earnings report, and it was better than expected. The stock market will like that. Later this morning we get the Treasury report on long-term capital flows, likely to get ignored unless there is a shock. Tomorrow we hear Bernanke’s testimony to Congress, although nobody is paying much attention to the Fed these days - althoigh they should, since the Fed is becoming the most powerful player on the planet. On Thursday we get Jan PPI and on Friday, CPI (and stock option expirations).

One of Rocky’s Rules is that institutional news trumps economic news and trumps the technicals. Today the institutional news where there is uncertainty pertains to the ECB and natioanl European governments, esepcially Germany and Austria. We are pretty sure we undestand what is going on in the US, and while there is rancor and an unbridgeable ideological rift, at least we know what the Obama Administration wants to do and how it wants to do it. So far the makret is signalling that it is willing to keep an open mind about Detroit, the final Geithner financial sector plan, and California’s looming bankruptcy, the Big Three of the day. these are undeniably huge issues and normally would be US dollar-negatives, but (not to beat a dead horse), it’s worse eleswhere.



Although the UK has said it won’t nationalize the banks, nationalization looks like a very real possibility in Europe, which means an end to the Stability Pact and potentially the Maastricht Trety, too. Germany or Austria can’t nationalize banks without a lot of consultation with the other European nations and the EC. This may not happen, of course, but Moody’s has stirred up a hornet’s next with its report overnight, and that will continue to dominate the news for a long time to come. The implications are vast.



Consider US investors with positions in European stocks or funds that hold banks.



We don’t need corporate welfare in the form of a tax break for repatriation of overseas earnings - let Europe nationalize banks and US investors will run for the hills of home. This may be an overreaction because "nationalization" is such a dirty word - dirtier as a word than as reality, probably - but scaring folks out of the euro all the same.



Pounds to US Dollars = 1.4400
Pounds to Euros = 1.1174
Euro to Pounds = 0.8947


Bye For Now



Barbara Rockefeller

Foreign Exchange Trading

Forex Trading Reports - Click for a free trial down



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

we have faith in the world’s ability to produce more bad news.

Foreign Exchange - Currency Outlook

The most important comment today is from IMF Director Strauss-Kahn, the former French finance minister. Going into G7 today, he said "The problem is that the effect on the real economy, for the most part, is still to come." All the talk of better financial market regulation (the focus of French FinMin Lagarde as well as US TreasSec Geithner) is certainly needed, but we don’t have a clue as to whether G8 or G20 can coordinate initiatives and polices to get the global economy rolling again. It looks like differing priorities and ideologies are getting in the way. Everyone has a stimulus plan but each is independent of the others because of domestic political considerations. We find it curious that Germany is the most reluctant stimulator. This could be because the German banking system is in dire straits, worse than we know.

Some say that improving conditions in the housing sector are the key, chiefly halting the rising trend of foreclosures.

We do not agree.

Housing is a critical component but fixing it, even if that were possible, is no longer sufficient. Now the focus needs to be on the banking sector. Quite apart from the question of whether banks should survive horrendous management mistakes and in what form, the modern economy needs the multiplier effect of fractional reserve banking. Like it or not, it’s the bedrock of all modern economies. It’s why the North Dakota economy is okay and the economy of (say) Kenya is not.

Let's not get into whether fractional reserve banking is an evil thing, as some self-described Libertarians and various nut-jobs say. Evil or not, it's the way the world works and has worked for nearly a century, and there is no viable alternative (and certainly not gold). For all of us to have incomes, let alone "wealth," banks must lend. Fixing the credit system is Job One. It comes even before better regulation, much as it pains us to admit it. It comes before questions of trade protectionism and the distribution of hand-outs. If the banks are not lending, economies will continue to shrink. The UK, somewhat ironically, has been the leader in prodding banks to lend, followed by the US.

If all we do is follow risk aversion as measured by US initiatives or stories about initiatives and the stock market's reaction to the stories, we'd have to guess that the US will continue to deliver good news. This is not a vote of confidence in the Obama administration but rather a reflection on the way things get done in the US—fast, and changing fast if the response is not favorable. The problem for us in the Foreign exchange market is that good news means a drop in risk aversion and thus in the dollar. The dollar benefits from safe haven inflows that are much bigger than what we see in the bond auctions or even the Treasury's capital flow report. It’s hot money with a holding period of one day. If the financial world decides to invest in (say) higher-yielding and still-growing places like India and China, the US dollar is the thing that gets sold.

Having said that, the contraction in European GDP today means the ECB will be cutting rates (while the US is done with that one). Paring positions ahead of G7 was always to be expected. A weekend announcement of yet another financial sector problem - possibly in Europe - could change everything back to a loss of appetite for risk - and it "should." We are not willing to abandon a trend that is clear on the charts and clearly backed by realistic economic analysis for a flyer on other currencies whose countries have yet to admit to structural economic problems. In other words, we have faith in the world’s ability to produce more bad news.

Euro Exchange rate last at 1.2867

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

Trichet and his cohorts on the ECB policy board are smart guys

Foreign Exchange - Currency Outlook

The big release today is retail sales, probably a drop of 0.8%, according to the Bloomberg survey. We also get the usual weekly applications for unemployment beenfits, probably a horrifying 610,000 for the Feb 8 week after 626,000 the week before. Another Bloomberg survey finds that the consensus of economists is for the US economy to contract at an annual rate of 5% in Q1, with Q2 delivering a lesser contraction of 1.7% and the full-year coming in at –2% y/y. The slide in consumer spending will be the longest-lasting on record, says Bloomberg. One economist says all four quarters would be negative without the Obama stimulus plan. By 2010, we could see growth at 1.9%, with 2.9% in 2011 - but the odds are barely in our favor. "Economists estimated odds that the economy will be out of the recession in the next 12 months at 53 percent, down from 55 percent in January, the survey showed."

The unemployment rate will rise to 8.4% this year and 8.5% next year before recovering to 7.9% in 2011, and "the federal budget deficit as a percentage of GDP will average 10 percent this year, a postwar high." We say 10% is a mere bag of shells. Unless everything goes smoothly, it could be 20% or 30% or some other number.

Recounting the economic catastrophe in the US tells us something about what to expect elsewhere. The US is more flexible/adaptable than most other economies, especially in labor markets. If the US is going to contract a net 2% this year but be coming out of it by year-end, should we assume that the eurozone will decline by more and lag by (say) two quarters, if not more? Yes. This is our "it’s worse elsewhere" argument we imagine it still stands. We also think that Trichet and his cohorts on the ECB policy board are smart guys, and if they are reluctant to cut rates to zero, they must have a really, really good reason beyond stubbornness for the sake of stubbornness. (We might not have said that of Duisenberg but Trichet is a different color of cat).

Ironically, if the market starts believing that a delayed Geithner plan will be a better plan, and if he speaks well at G7 (squeaking to Congress was not awe-inspiring), confidence could come back and this is dollar-negative. Whether we like it or not, the US is taking the global lead on stimulus and on financial sector restructuring. The UK has a somewhat different model (entailing insurance/guarantees, Gilt-buying and probably bank nationalization) while the US is going for a free-market approach that will be messier but solve the problem of pricing toxic assets. We are inclined to believe that mid-year is a real possibility for a turn in the tide—unless another wave of Alt A or other defaults comes along, and maybe by then we will have a mechanism in place to deal with it. Everyone else will still be lagging along…

We like the US dollar again for the near-term, which is now on the order of only about 6-12 hours.

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

Pounds to US Dollar rate rallies as things are worse elsewhere

Foreign Exchange - Global Currency Outlook

For stock markets to rally, even a little, on hope of an okay payrolls number and an acceptable Geithner plan is the triumph of hope over experience. The reduction in risk aversion is premature. A few points - Geithner was the NY Fed president who helped design the original $350 billion TARP handout that overpaid by 25-30%. What makes us think he can do a better job only a few months later? To be fair, maybe nobody can do a good job but that’s not what matters. What matters is that markets are so tired of fear and more fear that traders are grasping at straws. A little greed feels like relief.

But it’s just wishful thinking.

For another thing, the Jan payrolls number is not the only data point that counts. The combined totals over several months (and historical revisions) matter, too, not to mention the rest of the first quarter. Feb is a short month but it won’t be until the first Friday in April that we see the scope of the job losses. We could have had four months of 500,000+ losses, or over two million newly unemployed. This is going to scare the pants off everyone, and rightly. The Obama simulus plan is supposed to save or create 3 million jobs.

Well, two-thirds of it is probably already gone.

Foreign Exchange Analysts blythely say that if the payrolls number is horrendous (say 650,000), the us dollar exchange rate is expected to rise on renewed risk aversion (and presumably send the yen higher again). But back in the sane world, bad payrolls on this scale are bad for the US economic outlook and it’s simply ridiculous to expect a huge disconnect like this between growth and the currency to be long-lasting. At some point, the US and the US Dollar have to be punished for bad results. If your economy is getting a grade of F, your currency cannot thrive for long.

Unless "things are worse elsewhere." And they are. We still have not heard of all the scandals teeming under the surface of the European banking sector. Some of the European economies are in worse shape than the US, which must mean defaults and failures are about to hit the fan. Moreover, Trichet and the ECB are having a "profound" discussion of liquidity traps and why inflation is still a big risk. This is fairly dumb. The US, for all its faults, actually looks better. Whne the messy, inadequate, politically screwed-up US actions look good relative to others, the world is in truly, deeply bad shape.

No wonder gold is holding on to gains over $900 and clinging to the top of its channel. Many forecasters agree that another run to $1000 is inevitable given the high degree of uncertainty in the world today - regardless of the dollar rising or falling. UBS. For example, see demand doubling in 2009 from 2007, chiefly on the long-term inflation outlook. We say this is facile and simplistic. We will get economic contraction everywhere with falling incomes and falling wealth. Inflation is years away, not weeks or months. If this perception gains traction, gold is likely to fade back to the linear regression on the perception that yield is a desirable thing in a near zero-return world and that liquidity is a priority and not something to be shrugged off.

As always on payrolls date, we advise you clean your desk today and not hold any Foreign Exchange positions.
This is a crapshoot, not high-level decision-making based on deep intellectual considerations. You may want to sell euros up around 1.2950 if the payrolls number is really bad on the expectation that the dollar exchange rate will gain on the day and into Monday. That’s a medium probability outcome but it’s still gambling.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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