Australian Dollar Exchange Rate has everything going for it, from commodities to a higher yield.

Foreign Exchange - Currency Outlook

Among the large amount of data this week, including IFO business sentiment tomorrow, today we get the Case-Shiller home price index for June, forecast at a drop of 16.4% y/y in the Bloomberg survey or the smallest drop in nearly a year. The index was down 17.1% y/y in May but had risen 0.5% m/m for the first rise monthly since July 2006. Also this morning we get the Conference Board consumer confidence index, probably rising in Aug for the first time in 3 months to 47.9 from 46.6. Tomorrow it’s July new home sales, probably a 4th monthly rise.

It may seem that we have decoupling of the US stock market from the Shanghai Composite, with today’s outcome a test case. But foreign exchange traders everywhere have their own reasons to worry about having gotten into equities too far, too fast and making too rosy assumptions about recovery. If you want to feel optimistic, you can find green shoots to justify trying to get in early, whether it’s German industrial orders or possibly bottoming US housing construction (US homebuilder stocks are up 36% as foreclosures continue to rise—go figure).

But if you are looking for reasons to feel fearful, they abound, too. Bernanke said at Jackson Hole that major difficulties remain. Today the EC chairman Barroso said there is "still no firm recovery" in the EU economies. China is talking out of both sides of its mouth, with one official saying the recovery is too fragile to change anything and another one stepping up to say bubbles are forming and must be burst.

Similarly, we have a huge simmering debate just under the surface about whether we are going to get massive inflation or perhaps a bout of deflation comes first. Pundits opine that Bernanke may seize this moment to institute inflation targeting, which would probably be a good thing for public confidence but opens all kinds of doors for money and bond market shenanigans, the one good reason not to do it. The problem with the inflation/deflation argument, and the sideline story about the proper role of a central bank, is that just about everyone has an ideological slant and it’s really, really hard to get an unbiased grip on the true issues.

We say the most important things is not whether the Fed should have a dual mandate or only an inflation mandate, but rather explicit recognition that mostly free capital markets historically have an intrinsictendency to boom and bust, or mania and panic. Once we acknowledge that, it’s not much of a leap to say somebody ought to be in charge of managing institutional behavior in such a way to avoid the worst consequences of both mania and panic. Right now we have a mishmash of regulatory agencies, with more agencies proposed and a wild tangle of responsibilities. We don’t know whether it should be the Fed in charge of manias and panics or some other agency, but the independence of the Fed argues for it taking the job. This opens a can of worms, of course, with the extreme right wanting no regulation on the perfectly sound thesis that government interference always causes nasty unintended consequences, but the extreme left making the equally sound argument that panics harm the non-elite the most and for longer periods of time. See, you can't talk about this stuff without getting political!

But it’s a welcome argument if we can keep the nutcases from dominating the story.

Back to the US dollar exchange rate. There is a small chance that it will get rewarded with a firmer tone as good data comes in, but it’s still the last week of August and with the market thin, we can’t trust any such move. We guess the stock market will continue to rise during the early fall, with everyone’s nerves getting shot to pieces by October 1, with the US dollar slinking lower, but the possibility of a surprise jump can’t be ruled out. This is not very helpful. The one thing we feel the least uncertain about is the ascendancy of the Australian Dollar Exchange Rate - it has everything going for it, from commodities to a higher yield.

Pounds to US Dollars = 1.6358
Pounds to Euros = 1.1414
Euro to Pounds = 0.8758
Pounds to Australian Dollars = 1.9521

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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