Rockefeller Currency Blog

Unprincipled speculators are making billions every day by betting on a Greek default

2010-03-10T08:06:00.000-08:00

Foreign Exchange - Currency Outlook

Euro Exchange rate Special: Without naming names, today the WSJ reports "Greek officials" saying the high premium Greece is paying to issue bonds is "unsustainable" and must come down in the next two months. "Greece may formally seek European Union financial aid if its borrowing costs don't fall sharply in coming weeks and, if that doesn't work, will seek a rescue from the International Monetary Fund, government officials said." The preferred form of aid is for European state-owned banks to buy Greek debt. "The officials said Greece needs the spread to tighten to around two percentage points before crunch time: Athens must redeem some €22 billion ($29.92 billion) of bonds in April and May." Greek yields are about 3% higher than German Bunds.

“The first official said Greece will seek to raise a further 10 billion Euros through one or two bond issues this month, and between $5 billion and $10 billion through an offering in March or April targeting investors in the U.S. and Asia.”

Today’s bombshell follows a busy visit to the US by Greek PM Papandreou. He was all over Washington, meeting Congressmen, the President, the TreasSec and the IMF. Papandreou said "Unprincipled speculators are making billions every day by betting on a Greek default," and Obama was receptive to the idea of regulating speculation and that means it will be on the next G20 agenda.

With really interesting timing, CFTC Chairman Gensler said, according to the WSJ, that the US could adopt new regulations for credit-default swaps. The EU said yesterday it may try to ban speculative trading in credit-default swaps on sovereign debt in Europe. The WSJ says the US wouldn’t go that far. Gensler outlined several approaches, including a central clearinghouse, swap activity directly linked to bank capital requirements, and reform of bankruptcy law. In other words, we will get restrictions on speculation when pigs fly. Gensler seems to be one of the heroes in all this but it remains for Congress to do something. Gridlock in Congress, not mention infuriating stupidity, is enough to drive support for executive orders.

In Europe, German Chancellor Merkel agreed that rules should be rushed to halt “the most speculative elements of derivatives trading, including so-called naked transaction, which do not hedge the value of real assets,” according to the FT. On another matter, the formation of a European Monetary Fund, the head of the Bundesbank and probably the next head of the ECB, Weber, said the debate over a monetary fund as “unhelpful” and “a sideshow that will distract from the necessary (fiscal) consolidation.”

As for the IMF, everyone agrees Papandreou didn’t ask for aid or loans or guarantees, just “technical assistance.” We have no idea what that means. Fast computers? Spreadsheets? A gaggle of green-eyeshade guys? If the assistance consists of human beings, how will they greet the Eurostat guys in Athens?

It’s hard not to think all of this is meaningless drama, but it’s hard also not to recognize that Papandreou is a very smart cookie and handling this all quite skillfully. Today’s news, that “Greek officials” are now demanding guarantees so that the cost goes down, may destroy whatever sympathy Papandreou has engendered. It seems likely Greece can continue to issue the rest of the debt at high prices. The last two issues were wildly oversubscribed. Now it doesn’t like the terms, a 3% premium over German issues. Well, too bad.

Pounds to US Dollars = 1.4918
Pounds to Euros = 1.10955
Euro to Pounds = 0.9125
Pounds to Australian Dollars = 1.6303

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

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solution for the Greek debt problem

2010-02-11T12:40:00.000-08:00

Foreign Exchange - Currency Outlook

An announcement of a solution for the Greek debt problem is only that—an announcement. It will probably have the usual announcement effect - foreign exchange traders buying euros. A more positive tone and a sense of confidence that the EU/EMU will save Greece from itself is a good thing but only temporary. Words are good, in markets, but actions are better. Observers want to pore over specifics and if history is any guide, we are not going to get specifics today, or maybe ever.

Disillusion could set in very quickly. The bond and forex markets are not going to sit around for long basking the glow of apparent solidarity - they want details, and plenty of them. We remain deeply worried that the market will buy into a public relations exercise that will carry the euro exchange rate back up over 1.4000 to perhaps 1.4350. So far it looks like the market is being skeptical, but it’s never wise to count on traders making deep analysis on which to base trades.

Normally the shallow explanation is the one adopted, at least at first. If the market doesn’t accept the "accord" today, risk aversion will take off and and fx traders will be buying us dollars. This is what "should" happen but we have to wait and see.

Pounds to US Dollars = 1.5690
Pounds to Euros = 1.1466
Euro to Pounds = 0.8718
Pounds to Australian Dollars = 1.7624

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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euro exchange rate recovery this week?

2010-02-08T15:34:00.000-08:00

Foreign Exchange - Currency Outlook

We must always expect a bounce up off a big move down, and we may get that this week. On Friday, foreign exchange analysts used words like "panic," "frenzy," and "mayhem." Foreign Exchange Traders can’t sustain that level of adrenaline. A pullback is clearly in order. At the same time, it’s important to acknowledge that the US dollar trend has changed and that there are good and ongoing reasons for it. From a high around 1.5145 in late Nov, the euro fell to 1.4580 in mid-Jan, and further to 1.3852 on Friday. This is a huge move and unless something just as bad against the US dollar exchange rate comes along to stop it, we have to assume it will continue. That means we must evaluate the “reasons” given for any euro exchange rate recovery this week with a sharp eye. Just because something is oversold doesn’t mean it deserves to be bought for its own sake.

Deficit hawks have a strong case for disliking the dollar today. Commentators correctly point to gridlock in Washington, which is worse than wimpy presidential leadership, that will fail to resolve the US’ deficit dilemma. Yes, the US has a higher debt burden than Europe, if a bit less than Greece (about 10% vs. over 12% of GDP for Greece and about 6% for the EMU as a whole).

But we say this doesn't pass the "So what?" test. The US can tolerate higher deficits because it has a more flexible and resilient economy that is more likely to generate the higher tax revenue needed to cut deficits. The US is already emerging from the crisis, as Bernanke will talk about on Wednesday when he tells the House Financial Services Committee about removing emergency liquidity supports. Meanwhile, the ECB had to cobble together an emergency liquidity plan that saved the banks, just barely, but is at a loss institutionally on how to resolve the sovereign debt crisis. There is a vast difference. We may criticize the Fed for failing to acknowledge that the financial sector is not adequately self-policing or its responsibility to prevent bubbles, but the Fed did that one job quite well and the incident is ending. This gives the US dollar rate a strong base of support.

This week the data is not very interesting. We get trade, Jan retail sales, Dec manufacturing, and the preliminary University of Michigan consumer sentiment index. There is nothing here to support or detract from the real action, the eurozone saga of what to do about its southern tier.

By Friday of this week, we expect the euro lower, although you never know - if a correction gets a grip, we could end up with a longer-lasting pullback. The worst case is also possible--a choppy sideways move. But keep the faith.

Pounds to US Dollars = 1.5578

Pounds to Euros = 1.1407

Euro to Pounds = 0.8763

Pounds to Australian Dollars = 1.8036

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

Chinese will re-commit to the US dollar exchange rate

2009-11-12T12:46:00.000-08:00

Foreign Exchange - Currency Outlook

Everybody and his brother is calling for the Chinese to revalue, from the Philippines and Malaysia to the eurozone, US, IMF and World Bank. APEC finance ministers have so far resisted making the same call, but the summit isn’t over yet. The APEC chairman, Singapore FinMin Tharman Shanmugaratnam, said "From today's discussion, none of us were calling for, or thought it advisable, to have any sudden significant re-alignment of exchange rates." Asked about Chinese revaluation, he said "It's not a silver bullet for solving either the question of domestic demand or towards achieving balanced and sustainable growth."

Is everyone counting on Obama to pull the rabbit out of the hat?

Market News reports today that the Chinese say he won’t. The report says "China has no plans to allow the yuan to appreciate in the short term because the economy is still recovering from last year's global financial crisis, a source familiar with discussions among monetary policymakers told Market News International Thursday. The source said that the government expects to receive a message from President Barack Obama about the need for greater exchange rate flexibility during his visit here next week. Obama will be making his first official visit to China November 15 to 18. His visit will include talks with President Hu Jintao and Premier Wen Jiabao. 'China will not see Obama's requirement for more exchange rate flexibility as a key consideration,' the source said."

Well, of course the Chinese would not tip their hand ahead of time if they do plan to deliver Obama a big victory. And if they do deliver such a victory, what is the cost? The Chinese would not be giving it away for free. Another unnamed official told Market News that "China's exports are more important than U.S. deficits. The Chinese government will not ask for any specific U.S. announcement about an exit strategy but will simply mention it." This is the usual ploy of changing the subject to avoid talking about the elephant in the living room. Or maybe the Chinese will re-commit to the US dollar exchange rate and promise to stop talking about SDR's in return for keeping the US dollar peg a little longer.

Nobody knows what the outcome will be, but clearly something is afoot. Uncertainty about the size of the something is US dollar rate -favorable all by itself since it raises the idea of tectonic shift in sentiment and real flows. But we must not allow expectations to get too high. Summits hardly ever result in a big change. One of the few exceptions was the US TreasSec hounding China at G7 on revaluation a few years ago - and it worked, albeit not right away. The next two or three days will require nimble foreign exchange trading trading with close - in stops and a willingness to be open-minded. Adopt the Boy Scout motto and "be prepared."

Pounds to US Dollars = 1.6579
Pounds to Euros = 1.1071
Euro to Pounds = 0.8949
Pounds to Australian Dollars = 1.7968

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

Talk of a drop in the euro rate due to foreign exchange traders selling euros below to 1.4900

2009-11-11T13:29:00.000-08:00

Foreign Exchange - Currency Outlook

Yesterday Dallas Fed Pres Fisher said the decline of the dollar exchange rate has been orderly. We are stunned by this statement. For one thing, the Fed hardly ever talks about buying dollars, which is the Treasury’s turf. For another, it implies approval of the any decline as long as it’s not disorderly. Fisher went from an inflation hawk to now seeing more deflationary concerns than inflationary ones, suggesting that a falling dollar is a good anti-deflation tactic. The risk we run by maintining low interest rates is that it fuels the carry trade and eventually the Fed would have to "craft an appropriate remedy." Holy cow, is Fisher wishing for a US dollar exchange rate crisis so that the Fed can step in with anti-speculation measures?

The mind boggles.

Our favorite Fed, San Francisco Fed Pres Yellen, again said the recovery will be L-shaped, if with an upward tolt, with deflation a bigger risk than inflation and unemployment probably staying high for years to come. Atlanta Fed Lockhart is most worried about commerical real estate and worries the banking system ,not yet recovered, will face another blow.

More to the point, World Bank Pres Zoellick came right out and said emerging markets face a greater threat of inflation and asset price bubbles than developed one. Speaking on the sidelines of the APEC summit in Singapore, he said Asian "central banks need to look beyond just raising interest rates to constrain the amount of liquidity that has been injected into financial systems in response to the crisis,"according to Market News. Bubbles could undermine confidence, whereas "In the U.S. and Europe, because things are in relatively weak conditions, I don't see likely inflationary effects at this time. In East Asia if you start to get a strong rebound in growth and a lot of liquidity there is the question of whether one could start to face asset bubbles in particular markets."

Out of all this, the Chinese potentially revaluing against the dollar by adopting a basket should have the biggest effect. Quite apart from the global political implications, it could be a giant boost to European exports, whereupon Europe's trade surplus will appear to be an issue. It already is an issue, but not as much as the US’ deficit. Then the question becomes whether China diversifies further into the basket currencies. On the whole, the news will be interpreted as dollar-favorable, but underneath, it’s only US-favorable. Talk of a drop in the euro rate due to foreign exchange traders selling euros below to 1.4900 and below is based more on technical ideas than on economic analysis. New euro exchange rates demand from China is the same thing as a weakness factor for the dollar, and a biggie. Fixing the global imbalance is a good thing for the world, but not necessarily for the US dollar itself.

Pounds to US Dollars = 1.6574
Pounds to Euros = 1.1060
Euro to Pounds = 0.9039
Pounds to Australian Dollars = 1.7813

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

Pound and Euro exchange rate outlook improves

2009-11-09T08:44:00.000-08:00

Foreign Exchange - Currency Outlook

Unless something happens that is now unforeseen, most FX analysts expect a return of the status quo - rising growth nearly everywhere means the Great Recession is ending and it’s safe to seek yield in riskier places and in riskier assets (away from the US and the dollar exchange rate). We never had any right to expect that G20 and the IMF would be effective in pressuring the Chinese to revalue - they are weak organizations with no enforcement or compliance capability, and the Chinese know which side of the bread their butter is on.

It may well be that the US secretly took everyone aside and asked for reticence on China, since the weak US dollar rate really is good for the US economy, even if it’s not good for consumers, but then the US would have been risking a deeper drive out of the dollar as a reserve currency - so if it was some kind of ploy, it was a dangerous one. Does the US have a grand plan for the dollar? Almost certainly it does not, and any talk of US policy being designed to weaken the dollar deliberately is silly. Analysts suspected that was the not-so-secret Bush agenda but we have no evidence this is how the Obama Administration thinks. Still, "allowing" it to weaken (for a greater good like export industries) is another matter.

Clearly Washington is unfazed by the rise in gold (as long as it’s not fuelled by inflation expectations except by a few nutcases). That it is also fuelled by a bigger cohort who fret about budget deficits seems to be only slightly more worrisome. It seems that when it comes to matters pertaining to the dollar exchange rate and related matters like gold, the Administration is going to remain silent. We wonder if Obama even feels much pressure for results from the China trip this week. This is a laissez-faire approach that is not getting the attention and perhaps praise it deserves from those who think Obama is a control freak or a pinko or a big-government collectivist (to revive a Randian term now that two big Rand biographies are being reviewed).

We expect the US dollar Rate to embrace and surpass the 1.5000 mark now that it has kissed the level. Round numbers are nice, and will suffice - next stop, 1.5250.

Pounds to US Dollars = 1.6723
Pounds to Euros = 1.1148
Euro to Pounds = 0.8967
Pounds to Australian Dollars = 1.7997

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

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

2009-08-25T10:01:00.000-07:00

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
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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

US dollar rate is the beneficiary of flight to safety

2009-08-20T10:41:00.000-07:00

Foreign Exchange - Currency Outlook

The US dollar rate is the beneficiary of flight to safety as declines in Asian stock markets, especially China, arouse fear of a really big equity market correction that might spill over to the rest of the world. Press accounts all say the Chinese market is expecting and waiting for government intervention to support it.

This is the main event but also undermining the euro is producer prices falling 7.8% when 6.6% was forecast, the most since just after the war. Fear of deflation is spotty at best - most foreign exchange analysts and investors are more fearful of inflation or hyper-inflation at some point down the road.

Pound exchange rate is whipsawing, down dramatically on Monday, recovering all of Monday's loss on Tuesday, and back down on Wednesday. Whew. This time the reason for sterling to drop (from 1.6593 just after the US close last evening to 1.6372 at 5 am today) is release of the minutes of the August BoE policy meeting. These indicate a spirited discussion about raising the amount of quantitative easing and a final vote of 6-3 in favor of the £50 billion increase.

According to Reuters, the market thought there had been consensus and more surprising, "The three dissenters, which included BoE Governor Mervyn King, had wanted an extension of 75 billion pounds."

Pounds to US Dollars = 1.6569

Pounds to Euros = 1.1730

Euro to Pounds = 0.8525

Pounds to Australian Dollars = 2.0100

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

Oil is down because the dollar exchange rate is up?

2009-08-18T10:46:00.000-07:00

Foreign Exchange - Currency Outlook

We had the US stock market rise on a really stupid report that the unemployment rate was not rising (with the global market following). We say "stupid" because obviously the rate was a function of many workers falling out of the job market as the government defines it, so not exactly a rigged number but not an accurate one, either - and everyone knows it. Now we have the Shanghai Composite leading the world’s stock markets, with nary a reference to better-than-expected earnings or P/E ratios or any of the usual chatter about underlying, dare we say fundamental, conditions in the US or elsewhere. We like to joke that stock market traders are a bunch of flibberty-gibbet little girls, alternately hysterical or skipping madly down the street (and failing to look down). But never has such a description been more appropriate. Stocks are down because a butterfly flapped its wings in China, thousands of miles away? Oil is down because the dollar exchange rate is up? How old are these people?

The germ of truth in all this is that China has defied conventional wisdom and managed to make its stimulus package work faster and better than anything in the West (except Cash for Clunkers, which is wildly successful in Europe and the US). Growth will still be huge, 8% if not the 9.5% originally expected, while the rest of us will be lucky to see 1-3%. China still depends to some extent on the US consumer for export business, but has robust two-way trade with Germany and Japan, so maybe the US doesn’t lead the world, after all. But China doesn’t lead it, either. We all know that Chinese banks would be both involvent and bankrupt if they were not state-owned and the borrowers mostly state-owned, too. Property and other asset prices are almost certainly inflated. The Shanghai index is a bubble - again. Any kind of reality-check would have investors fleeing for the hills - and yet China is the best game in town. It offers unknown and unknowable profits as long as the state keeps the music playing and nobody has to run screaming for a seat. The widespread preference for a rigged market is stunning. No wonder the US dollar rate and yen are the beneficiaries when a whiff of control and sanity reaches our nostrils. From a historical point of view, the Shanghai is an accident waiting to happen.

And yet the Chinese are very, very good at managing the process. It may look like warp-speed from medieval conditions to modernity, but in fact the Chinese government acts with a lot of restraint, considering the pressure on it. Who is to say they will fail? We would never bet against them. So that is the tense situation—an awful combination of awful conditions but utter faith in the managers. It would seem the

Chinese government has more credibility today than the Fed. We also pay heed to the need to keep up the fiction that all is well. Pride is important, appearances are important. China manged to overcome one giant bubble burst in the Shanghai index and it can overcome a second one, if that is what we get.

We don’t know if this big-picture perspective is correct, but if it is, any safe-haven effect on the dollar from wobbly situations in China are likely to be short-lived. That in turn implies that the rise of the yen has limits, too.

Pounds to US Dollars = 1.6569
Pounds to Euros = 1.1730
Euro to Pounds = 0.8525
Pounds to Australian Dollars = 2.0100

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

US dollar rate is losing ground against the euro exchange rate

2009-08-13T11:27:00.000-07:00

Foreign Exchange - Currency Outlook

The US dollar rate is losing ground against the euro exchange rate and other majors this morning after the Fed statement calmed risk aversion and promoted risk appetite. On the hourly chart of the euro, you can see a spike to 1.4239 and a bigger spike down to 1.4120 in the Fed statement hour, suggesting that not everyone understood the statement immediately. Those who had been buying euros in anticipation of the outcome got their stops hit, and then the euro exchange rate turned into the close and started rising in earnest. From the 8 am New York open at 1.4142, the euro ended the day at 1.4201 - but after the US close, the euro took off higher at 1.4282 so far.

Note that 1.4280 is about the midpoint of the downside 6-hour breakout bar last Friday. The euro rate has to surpass this level to form a convincing uptrend restoration. The announcement that European GDP growth is up has failed so far to get that effect, which is a little surprising. If the dollar exchange rate rose last week on seemingly good economic news (despite the smaller-than-expected drop in payrolls clearly a statistical fluke), why would the US dollar rate not rise on the Fed statement, which is pretty close to a proclamation that the recession is over?

Reuters reports that the dollar vs japanese yen, rising off yesterday’s low at 95.10 to 96.30 so far today, is influenced by “Japanese investors repatriating funds related to $27 billion in coupon payments on U.S. Treasuries due on Aug. 15. In addition, $61 billion in coupon securities mature on the same day.” This is capping the dollar's rise. Where does the dollar/yen fit in the risk appetite profile? The yen is supposedly a bigger beneficiary of risk aversion than the dollar, so dollar/yen is a duel for which currency gets more relief when fear abates. Besides, why would the Japanese will not turn around and re-invest proceeds back into foreign markets, as is their wont? Only if fear were really high, and rising global stock markets are not sending that signal. We have to go through this laborious process in thinking about the yen because some of the recent moves are so hard to understand.

Pounds to US Dollars = 1.6579
Pounds to Euros = 1.1610
Euro to Pounds = 0.86089
Pounds to Australian Dollars = 1.9690

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!

Buy Travel Money, Buy Holiday Money, Best exchange rates for Travel Money

Contact IMS Foreign Exchange + 44 207 183 2790

Euro Exchange Rate should make a new low before new high

2009-06-29T09:36:00.000-07:00

Foreign Exchange - Currency Outlook

The best euro rates made a run-up on Friday to 1.4120 off the Thursday low at 1.3885, but the high failed to match the previous high at 1.4138.

Does such a small amount matter? Yes.

Failure to make a higher high usually implies that next we test the downside at the previous low, but this is a very strange market. It’s also a bad week with the US on holiday on Friday. This time the bond market doesn’t close early on Thursday but that probably doesn’t matter since the holiday mindset may hold sway all week. If the June pattern continues, we will get the us dollar rate up in the morning and down in the afternoon, or vice versa.

Overnight the euro exchange rate hit a low of 1.3980 as traders "probed for stops," according to Market News, but “Russian demand was then noted around the lows, with a UK clearer cited for the recovery back on to a $1.40 handle.” This suggests the market is thin and also reminds us that Russia is no friend of the us dollar exchange rate.

Pounds to US Dollars = 1.6330
Pounds to Euros = 1.1784
Euro to Pounds = 0.8489
Pounds to Australian Dollars = 2.0800

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

US Dollar exchange rate battles the Euro and Pound again

2009-06-22T13:31:00.000-07:00

Foreign Exchange - Currency Outlook

The third week of every month is stuffed full of economic data. See the US calendar below. You can get a pretty good global economic calendar. This time, we also have major institutional changes to contend with, too, not to mention the abiding question of how the market will like the Treasury’s new $104 billion in debt issuance this week.

We live in perpetual fear of a failed auction - that the Treasury will hold a party and no one will come.

As for "announcement effects," Market News writes that "No one expects the Fed to expand its quantitative easing program beyond the maximum $1.75 billion already announced for potential purchases of Treasuries, Agencies and Agency mortgage-backed securities." The Fed might, however, alter the composition, or make a statement that it’s not targeting specific interest rate levels, or some other minor change.

As for overall risk aversion, the Foreign exchange market is dependent on equities and commodities. If they fall for whatever reason, the us dollar rate immediately gets the benefit. It may be tiresome to keep reminding, but remember that these intermarket correlations are unreliable. They are strongest when conditions are panicky and uncertainty is high, but they tend to fall apart when one group gets a grip. Part of the current problem is that Foreign Exchange volumes have been low of late. This raises the opportunity for a single player to have undue influence.

We are always skeptical when the dollar exchange rate looks strong, since the bias against the dollar is a long-lasting, deep and powerful one, if not entirely rational sometimes. See the "dueling channels" on the charts. Either interpretation (Buy us dollars or sell us dollars) is equally plausible. On the whole, a healthy dose of skepticism about green shoots is justified.

Whether fear “should” rise to the level of a dollar rally, however, is in question.

We would like to see more attention paid to the German deficit issue. Some foreign exchange analysts say a crisis is brewing in euroland. This is not the universal perception but if it were to get a grip, we’d have real risk aversion and a really good reason for dollar recovery, since US institutions are in better shape or at least at less risk. Watch for the euro to surpass 1.3750. If it does, we can expect 1.3420 or so.

Pounds to US Dollars = 1.6330
Pounds to Euros = 1.1784
Euro to Pounds = 0.8489
Pounds to Australian Dollars = 2.0800

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

things are getting worse at a slower pace

2009-06-19T09:17:00.000-07:00

Foreign Exchange - Currency Outlook

Good economic data, universal expectations of recovery starting this year, and institutional change occurring without street riots are all favorable but in the new perverse world of risk-appetite driven exchange rates, "should" be causing the US Dollar Rate to fall. And yet the us dollar exchange rates has closed up on 8 of the past 15 days for a net gain of about 200 points over that two-week period. Wait a minute. This is backwards. The dollar exchange rates should be falling on good US news as the need for risk aversion abates. One explanation is that commodities in general and oil in particular look like a top is in, for the moment, so that if we get another surge in the uptrend, it will be more modest. This reduces dollar selling but doesn’t offer support for dollar buying.

As stated in the Summary section, we have a pretty good grip on the economics - things are getting worse at a slower pace and Bernanke was right, we do see some green shoots here and there. The only really big issue on the economic front is whether deflation should be a worry, but for the moment, deflation-deniers are holding their line and inflation fear-mongers, apart from the perpetual lunatic fringe, are quiet.

The real action and the real thought-provocation is coming from the institutional side. The BBA, for all its 19th century faults, is fostering greater transparency in the money market. Switzerland is leading the way on addressing "too big to fail." Europe is failing to achieve regulatory coherence, let alone excellence, revealing its fatal flaw as a potential reserve currency issuer. China is putting more eggs in the US basket and the US is at almost no risk of a ratings downgrade. The US president may be contemplating regulating the oil market and squashing the destructive speculation that has doubled the price of oil in just a few months, threatening the global economy.

Wow!

These are really big developments. The next chapter is the Fed meeting and everyone will be glued to the TV next Wednesday at 2:15 pm ET to hear whether the Fed is changing anything.

We guess it will not, and will issue a cautiously optimistic outlook.

On the whole, aside from some hot spots like Iran and N. Korea, things are actually looking pretty good, or at least better than they have looked in a long time. Don’t laugh, but in the New York region we have sunshine this morning for the first time in over a week, too. It has rained so hard for the past week that you can almost see the grass grow. If we were a gambling lady, we’d place a bet on the US stock market rising this morning, which should be US dollar-negative, of course. But more rain is forecast, so we can't predict anything about this afternoon going into the close. Again we counsel "just say no" to taking a position in the Foreign Exchange market, unles you can stick to the screen and keep your trade to under 30 minutes.

Pounds to US Dollars = 1.5512
Pounds to Euros = 1.1805
Euro to Pounds = 0.8465
Pounds to Australian Dollars = 2.0400

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

US Dollar Exchange Rates may be hanging on to gains today

2009-06-17T08:54:00.000-07:00

Foreign Exchange - Currency Outlook

The US dollar exchange rate may be hanging on to gains today on a renewal of risk aversion as oil is dropping and stock index futures predict a rocky opening. Confidence in the US as economic and financial leader may be rising as the Obama Administration announces new regulations today. The euros to us dollar exchange rate is see-sawing in a narrow range and we are looking for a breakout.

Pounds to US Dollars = 1.5305
Pounds to Euros = 1.1752
Euro to Pounds = 0.8050
Pounds to Australian Dollars = 2.0600

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

the euro exchange rate is capped around 1.4620

2009-06-16T08:58:00.000-07:00

Foreign Exchange - Currency Outlook

The drop in oil, commodity index, and equities yesterday could be the start of a bigger corrective move—or not. The Reuters-Jeffries CRB index closed down 2.24% after posting a 7-month high on Friday. Oil has doubled this year. Everyone pretty much agrees that such big price rises were unjustified on the basis of any sane review of fundamentals and driven by too much "green shoots" optimism. For the price correction to last only one day would be unusual, given the size of the move - but alas, not unheard of.

We tend to think the corrective move will continue but confess our reasoning is inductive - the giant sell-off in the Australian dollar, enough to break the trend channel. We hear from Australia that domestic conditions may look okay on the surface, but in reality, this is a lot of PR on the part of the government and regular folks are losing jobs and cutting back spending just as in the US. Old-timers say the Swiss franc is what leads the market, but we have found in recent years that it’s the A$, possibly because it’s a commodity currency and a high-yielder, to boot. If traders are dumping the Australian Dollar ezxchange rate maye it’s because they want less risk, whether funded by yen or US dollars.

The important point here is that the makret is equally divided between those who see the euros to us dollars at 1.4500-1.5000 and those who see it down around 1.2000-1.2500. As we wrote yesterday, it’s fairly easy to make the case for either scenario. What’s galling is that every day we get a reversal based on a new interpretation of Big Picture factors. This is unsustainable - isn't it? Technically, it’s hard to know what timeframe to look at. You get a totally different trading recommendation from the daily chart (sell euros) than from the hourly (buy euros) or the weekly, which also shows a rising trend. What may seem a false breakout in one timeframe is a legitimate breakout in another. It’s odd and unsustainable to have a sell signal in the Australian Dollar Rate but not to get the same signal to sell euros in pretty short order.

We are inclined to think the euro exchange rate is capped around 1.4620, about a two-thirds retracement of the big euro rate drop from 1.6037 last July at the height of crisis perception. But while we can make the argument for the dollar to recover to the end-Oct euro low around 1.2329, we don’t believe it, mostly because of the long-standing anti-dollar bias that uses any and every factor as “evidence” the dollar should be weak, even if the evidence points at exactly the opposite conclusion. For example, we just had China, Japan and Russia (well, the finance minister) offer powerful support for the US dollar as lasting reserve currency - but one comment by the Russian premier cuts it all down? This is not reasonable. The market’s response to European banking sector woes is equally lame. This is a big problem that the ECB is brushing off (and possibly under-counting), and the market is willing to let it go. We say prejudice is a powerful thing and the market finds it safer and more reliable to sell dollars when in doubt. It will take a shock, like a big equity/commodity correction, to change this bias, and even then, dollar rallies are shallow and short-lived.

From a trader’s persepctive, unless you can trade on the 10-minute chart, the wise thing is to stand aside. Trading on a 24-hour timeframe is proving to be too costly.

Pounds to US Dollars = 1.5305
Pounds to Euros = 1.1752
Euro to Pounds = 0.8050
Pounds to Australian Dollars = 2.0600

Bye For NowBarbara 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

US dollar exchange rate remains on the defensive for many reasons

2009-05-14T12:44:00.000-07:00

Foreign Exchange - Currency Outlook

Today we get the producer price index, probably a rise on the commodity price improvement over the past month, according to Bloomberg, which sees PPI up 0.2% after a drop of 1.2% in March. The forecast range is -0.6% to +1%. Tomorrow it’s CPI, also probably a positive number. We also get the usual weekly jobless claims, probably a rise by 610,000 in the week ended May 9 from 601,000 a week earlier. A big chunk will come from the Chrysler closing. This reminds us of another Shock on June 1, the due date of General Motors reorganization plan. This is only two weeks away and yet it’s not causing a stir. Some say a bankruptcy by GM is not "systemic," but we say that politically, it sure is systemic.

We know that uncertainty over the timing and extent of recovery is in doubt, and now the stock and oil markets are pulling back in recognition of it. The price of gold went way up, breaking a downchannel, and closed at $925.50, triggering the perpetual forecast of $1000. The problem with pooh-poohing that forecast is that it’s probably correct if we believe that many economies, including the US economy, will by-pass deflation and head straight for inflation.

Nobody ever knows how long a correction will last or how far it will go. Now that risk-aversion is driving the foreign exchange traders to buy dollars again, we need to watch equity prices and oil to figure out what happens next. We guess that the stock indices will continue to drop and yesterday’s move was not a one-day event, but the US dollar exchange rate remains on the defensive for many reasons. Covering short US Dollar positions is not the same thing as buying dollars outright, from a sentiment point of view.

We need to be nimble.

Pounds to US Dollars = 1.5230
Pounds to Euros = 1.1158
Euro to Pounds = 0.8957
Pounds to Australian Dollars = 1.9999

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

German banks have $1.1 trillion in losses yet to be recognized

2009-04-27T06:14:00.000-07:00

Foreign Exchange - Currency Outlook

Bloomberg has a story saying the US dollar exchnage rate wins whether it’s on the basis of risk aversion/ safe haven or the basis of FIFO (first-in, first-out). We are not so sure it’s that easy. For one thing, there is a component of market sentiment consisting of "confidence." Everyone likes Obama and the new robustness of Congress, with those saying they think the country is moving in the right direction at the highest level in 5 years. But criticism of the TreasSec Geithner is severe (that latest is that he's just a "bureaucrat") and it's not clear that the PPIPS program is a good one that will work. Alternatives are flying around the ether, and from reputable guys.

Meanwhile, Europe will be taking action at the policy meeting next week (May 7). The market has rewarded an active stance, paradoxically even if it entails a rate cut and what is really an admission of systemic failure by adoption of "unconventional measures." Unconventional measures are quantitative easing by another name, and we worry that the market will cheer the euro exchange rate when the ECB finally caves in and joins the rest of the developed world with both rate cuts and quantitative easing.

To complicate matters, we have more data and information this week than anyone can possibly absorb, let alone slot into a decent perspective. Tomorrow we get the Conference Board consumer confidence survey. We get first quarter advance GDP on Wednesday, along with a Fed policy meeting and the Treasury’s refunding announcement, which follows the Q2 and Q3 estimates the day before. Chrysler may declare bankruptcy on Wednesday ahead of the Thursday deadline for a deal with Fiat.

Wednesday is a day to stay in bed with your head under the covers.

The rest of the week is pretty awful, too. Thursday brings the first quarter Employment Cost index, a harbinger of the payrolls report on May 8. Friday gives us March factory orders, the April ISM report, and vehicle sales. Throughout all this, we continue to get earnings reports from all over the map. Considering that the stock market ended the week on an upbeat note, you have to wonder if US equity traders are just determined to plough ahead, refusing to be confused by any facts. The one fact that everyone plans to looks at is inventories. The idea has taken hold that if business inventories are really, really low, that's a good thing because it means business will soon start producing more.

We are suspicious of the US dollars move up on the swine flu story. We find the technical story more convincing, but of course a fresh fundamental can always trump the technicals. Since the stock markets seems determined to go up - while a related market, oil, is determined to go down on discouragement over the outlook - we have cognitive dissonance all over the place. The Foreign exchange market is where these controversies and conflicts get settled.

If the us dollar exchange rate continues firm today, that may mean the world is in worse shape than we thought last week. We are impressed by the story that German banks have $1.1 trillion in losses yet to be recognized. We have always said losses were being concealed in Europe. If this story is true and if it grows legs, we can see a good case for the dollar to recover in a more permanent way. Otherwise, watch out. The dollar can go back on the defensive in an hour.

Pounds to US Dollars = 1.4634
Pounds to Euros = 1.1143
Euro to Pounds = 0.8870
Pounds to Australian Dollars = 2.0444

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

we can see no fundamental basis for a stock market recovery

2009-04-16T08:12:00.000-07:00

Foreign Exchange - Currency Outlook

The Empire State Index from the New York Fed summarizes the situation as well as anything - it was less bad in April at -14.65 from -38.23 in March. This is not as bad as the -30 that was forecast, which would have been less bad than March but by less than the actual really-less-bad number.

Got that?

Remember that in a diffusion index, +50 is the dividing line between expansion and contraction, so an outright negative is really, really bad, even one in the teens. The sensible way to put it is to say the economy is still contracting but at a slower pace, but that fails to disclose and describe the true condition, and let's people grasp at the straw of "less-bad."

Evaluating these numbers is a bit like reconciling a falling income statement with a contracting balance sheet. At some point the numbers have to go positive just because the earlier numbers were so low, but that doesn't mean conditions are good.

We sometimes criticize "stockbroker economics" for misrepresenting economic truth, and this is one of them. What equity and some commodity markets are missing is that "less bad" doesn't mean "good." We like to assume that P/E ratios actually mean something. How can stock prices be rising while earnings are, or should be, or will be falling? We don’t care about equity prices for their own sake, but because they are the canary in the coal mine for the US dollar exchange rate. Rising stock indices in the US feed rises elsewhere in the world, with the odd exceptional Event like UBS' earnings announcement yesterday (that affected European bourses but not the US market, or by a lot less).

In sum, we can see no fundamental basis for a stock market recovery. If - a big if - the market starts seeing it that way, equity indices should fall. At this point they are being held up by an inaccurate assessment of economic conditions and unrealistic hope. The only possible rebuttal of this idea is that the Empire State also reported the six-month outlook jumping to 33.10 in April from 3.14 in March. Let's say the hopes of the survey respondents for improvement in six months is accurate. Therefore for stocks to rise as a leading indicator is okay, right?

No.

Expectations are exactly what the word says - expectations, not actual evidence, let alone proof. And 33.1 is a minority. It means the majority did not see an improving outlook in six months.
"Improvement" is a funny concept in economics. While we like the metaphor of the economy being organic and more like an animal than a machine, in this case the patient has the plague. It is getting big doses of antibiotics and being kept clean, warm and fed, but "improvement" is like saying the patient hasn't died yet and white blood cells are hard at work. Not dying is the good thing. Is this overly pessimistic? Maybe, but being overly optimistic is foolish. As Keynes is reported to have said, "The market can stay irrational longer than you can stay solvent."

Seeing an imaginary bottom is dangerous to your financial health.

Assuming more bad news is yet to come, foreign exchange traders will buy dollars as the dollar should benefit, even if the news is not as horrendous as what we already have seen (think of what we have already seen as the diagnosis of plague). To judge degrees of horrendousness is not really useful. Europe declining to be sufficiently scared is noticeable, though.

Weirdly, we expect pounds sterling to recover because the worst of all possible bad news is getting released.

Pounds to US Dollars = 1.4900
Pounds to Euros = 1.1292
Euro to Pounds = 0.8850
Pounds to Australian Dollars = 2.0685

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

buy us dollars as it is in an uptrend against the euro exchange rate

2009-04-15T08:41:00.000-07:00

Foreign Exchange - Currency Outlook

We will continue to get important data today and this week, including the TICS capital flow report, industrial production (probably a drop of 0.9% for the 14th month), CPI (probably a minor rise of 0.1% after 0.4% in Feb), and the Empire State manufacturing survey (probably a contraction to –35 from –38.2). But we think the battle between the banks and the government is the key event.

Tomorrow we get the JP Morgan earnings report, and on Friday, Citigroup earnings report and GE Capital. Next week it’s Bank of America, American Express, Ford Motor, Credit Suisse and Morgan Stanley.

We should assume that all of these try to put lipstick on the pig.

Then it becomes a test of analysts' ability, and the government's ability, to spot the cooked numbers. This is absolutely critical for the long-term health of the economy. Banks and industrial companies cannot be allowed to lie anymore in their financial reports.

The whole world believes US accounting reporting is corrupt, rigged, dishonest - pick a word.

And they are right.

The financial sector became powerful during the last two decades, accounting for 40% of total corporate profits and populating Washington with lobbyists and lawmakers beholden to them. A financial elite was formed that has hardly been tamed by the humiliation of a few, and government has been in thrall to the money-men, exactly the conditions that brought about reform in the 1930's. This time, the financial elite is resisting restructuring with amazing muscularity, mostly by scaring people into believing they are too big to fail and the status quo must be maintained. Alas, we are more like Japan than we thought in this respect. In Japan, the banks were and are cross-shareholders with industrial companies, hence too big to fail. In the US, the fear of financial market chaos vies with loathing of using public money to bail out the very elite that caused it. This is more than an economic or financial issue - it’s a social and political one.

Obama is walking a tightrope, indeed.

We think its time to buy us dollars as it is in an uptrend against the euro exchange rate and never mind that the reasons are unclear. The commodity currencies are also strong ,which if we believe conventional intermarket analysis, should be a US dollar exchange rate negative. But overriding it all is a renewed sense that this is indeed a global recession and it's foolish to think otherwise.

In that case, the US dollar is the safe haven.

Pounds to US Dollars = 1.5000
Pounds to Euros = 1.1370
Euro to Pounds = 0.8789
Pounds to Australian Dollars = 2.0777

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

The ECB has seemingly rejected quantitative easing even if it were allowable under treaty

2009-03-25T04:50:00.000-07:00

Foreign Exchange - Currency Outlook

Not to be a prude, but we disapprove of a government not only encouraging speculation in dodgy assets, but lending money - lots of money - for the purpose. Moralizing aside, the release of the PPIP marks the beginning of the end.

The equity market is not wrong.

The commodity markets are not wrong.

FIFO is alive and well… the US was the first to go into crisis and recession, and will be the first out. The implications for the US dollar are not yet clear. The US dollar rate can still tumble on the inflation/currency debasement conventional wisdom, or come back on the idea that “it’s worse elsewhere.”

The question remains of whether it really is worse elsewhere. On the whole, we think yes, it is. Europeans are downplaying both the financial sector problems and economic consequences, and to deny is to delay. ECB policy member Likkanen threw out a few drops of cold water, saying the ECB still has room for conventional monetary policy actions (translation—rate cuts) and if the slump gets worse, it can also introduce additional "innovative instruments." Translation - nobody knows. The ECB has seemingly rejected quantitative easing even if it were allowable under treaty, so we don’t know what innovation Likkanen may have in mind. But it’s clear that slow as the US Treasury was to get remedial action going, Europe is farther behind. This is the perennial structural difference between the US and Europe, and it accounts for perennially slower growth in Europe, if greater social stability. If the euro exchange rate is getting support from a relatively higher interest rate structure and that is about to be reduced to a tiny margin if not to zero, what is support for the euro rate, again? Thus there is a small glimmer that the US dollars rise may not be over, once this corrective bouncing is over.

Pounds to US Dollars = 1.4579
Pounds to Euros = 1.0790
Euro to Pounds = 0.9268
Pounds to Australian Dollars = 2.0907

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

we need a strong euro exchange rate in the current crisis

2009-03-17T10:56:00.000-07:00

Foreign Exchange - Currency Outlook

This morning we get US data that is sure to be a US Dollar negative, if the market chooses to heed it. Reuters reports that US housing starts probably fell to an annual rate of 450,000 units in Feb, another record low, after a drop of almost 40% in the previous three months. January's rate was 466,000, the lowest since the Commerce Department began keeping records in 1959.

This means speculative building has come to a screeching halt.

That's a good thing, isn't it?

It allows unsold inventory to get cleared. Reuters also reports that "Permits for future groundbreaking, which give a clue to construction plans, also are projected at a record low unit rate of 500,000 in February, down from January's pace of 531,000, which also was the lowest on record. Tight credit standards have made it more difficult for potential home buyers to get financing. And builders have cut activity sharply in an effort to whittle down a big glut of unsold homes.”"

The focus this weeks seems not to be on the US economy, though. Instead, the focus is on the euro exchange rate and the viability of the eurozone. Yesterday Trichet had on his cheerleaders' costume, telling an audience in Berlin that the euro rate is a "unique and irreplaceable anchor of stability and trust" and "Europe can rely on us to preserve that anchor." Also ,the ECB will "play as active a role as possible in the international financial institutions and international informal groups to which we belong." The ECB "always supports a multilateral approach." German Chancellor Merkel also said we need a strong euro exchange rate in the current crisis.

Does this mean European officials are willing to accept a too-strong euro at the expense of exporters to make their point that the euro rate can withstand a giant recession (the Friedman test)?

Yes, it would seem so.

Is it working?

Not really, if we consider the 8:30 move to near 1.2900. We expected a pullback but not to this extent. Now the euro rally is up for discussion. Many foreign exchange analysts had kept their forecast of a strong us dollar on either the safe-haven story of the FIFO story, so they will be vindicated if the move continues. We feel that all the stories are weak, especially the connection between equities and currencies. A prudent course might be to retreat to the sidelines as the euro bulls and bears slug it out.

Pounds to US Dollars = 1.4020
Pounds to Euros = 1.0798
Euro to Pounds = 0.8257
Pounds to Australian Dollars = 2.1207

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

Foreign exchange traders buying euros have created breakout to the upside is the real deal and it can extend to 1.3300

2009-03-16T07:08:00.000-07:00

Foreign Exchange - Currency Outlook

Hope springs eternal in the human heart. Stocks are rising everywhere--maybe the crisis is over. Such a view accepts that the stock market is a reliable forward indicator of the economy, an old adage that has some weight but not, perhaps, in a special case like the one we have now.

The decisions at G20, if decision is not too strong a word, is that the US will continue to create gigantic public deficits that will accrue to the benefit of all while Europe (selfishly) will ramble on about restoring confidence via stricter regulation. The latest version of European denial and delay is that recovery can’t come until confidence is restored and the path to confidence lies through tighter regs. It's a plausible story but off the point entirely. (Note that Japan committed to spending 2% of GDP in stimulus at G20, and it can least afford the extra debt of all G7.)

Still, the market likes the outcome, as we see from the euro exchange rate rising over 1.3000 easily and quickly this morning. It also likes the Bernanke performance on TV last night. He said recovery is coming and probably this year. Let's see - higher US deficits in the US, the same deficits in Europe. Which does the global investor prefer? On the whole, deficits are not a deciding factor in determining Foreign Exchange levels except when they are. We believe that Foreign exchange traders buying euros have created breakout to the upside is the real deal and it can extend to 1.3300 or so, which is the 38% Fibonacci retracement of the euro slide down from 1.4719 last December.

The market likes Fibonacci numbers, so we have to accept it however basically dumb it may be.

Pounds to US Dollars = 1.4070
Pounds to Euros = 1.0875
Euro to Pounds = 0.8275
Pounds to Australian Dollars = 2.1307

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

Obama plans is what is driving the stock market downward

2009-03-04T08:15:00.000-08:00

Foreign Exchange - Currency Outlook

We get the service sector PMI for the US today, presumably to show a similar contraction as the eurozone and at a fast clip. The Bloomberg survey gets a reading of 41 after 42.9 in Jan.

So what?

Do we not already know that the economy is contracting?

Far more important is how markets intend to deal with payrolls on Friday, and today, how they will respond to the new TALF news and other aspects of government initiatives. The political opposition continues to say that the Obama crowd is going about it all wrong and that lack of confidence in the Obama plans is what is driving the stock market downward. Even the normally sane Cramer asserted this idea. Obama responded badly, saying stocks markets gyrate but he is on a long-term path. Just one little comment to the effect that he is trying to restore free market capitalism (with tighter regulation) would have done the trick and changed the dialogue. Not saying it makes some people think he’s a pinko or a closet Commie.

Europeans sigh when they see this, but to be fair, Europeans like rigged markets.

Is it possible that market players are being overly influenced by the reporting?

Yes.

Instead of looking at earnings trends and other hard data, equity traders are obsessing about whether this plan or that plan fits in with some 10th-grade idea of "capitalism." It’s all a waste of time (like a lot of politics). Keynes was right and the Republicans are wrong. That doesn,t mean the current government is taking all the right actions or that the actions will work. It does mean that "expectations" are being skewed by ideology, and that is never a good thing. At some point this contentiousness may be a US dollar negative. Other dollar negatives are lurking in the shrubbery, including a possible rise in the price of oil, a political event, a terrorist act, etc.

We are a trend-follower and the US dollar trend favors additional gains, but it’s going to be an ordeal.

Pounds to US Dollars = 1.4000
Pounds to Euros = 1.1175
Euro to Pounds = 0.8940
Pounds to Australian Dollars = 2.1901

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

the US dollar is prettiest pig in the herd

2009-03-02T10:14:00.000-08:00

Foreign Exchange - Currency Outlook

This week we get more data than we can possibly absorb or understand, let alone put into perspective. We get the ISM report for both manufacturing and services, personal income, NAR Home sales, monthly chain store sales, Fed Beige Book, the ADP estimate of payrolls and on Friday, the biggie -payrolls. Market News says the median estimate in its survey is a drop of

"605,000 jobs in February, from 598,000 in January and 577,000 in December. Estimates range from -750,000 to -535,000. The unemployment rate is expected to rise 0.3% to 7.9% in February, with estimates ranging from 7.8% to 8.1% From December 2007 to January 2009, non-farm payroll losses have totaled 3,572,000 (December 2008/January 2009 may be revised). As a point of comparison, during the 2001 recession, job losses stretched out to 2003, ending in a total loss of about 2.5 million workers."

Note that the US Treasury's "stress test" for banks offers assumptions about everything, including employment. The baseline scenario asks banks to evaluate their asset book on the unemployment rate at 8.4% in 2009 and 8.8% in 2010, or 8.9% and 10.3% in the pessimistic scenario. At least one analyst (Westpac) says the "Treasury's worst-case call on unemployment is probably too upbeat,” according to Market News.

We agree, especially since the other assumptions are also soft - real GDP down only 2% this year and a bounce up of 2.1% in 2010. Really? Market News says "The alternative adverse scenario is based on a 3.3% GDP contraction this year followed by a modest 0.5% recovery in 2010. Other Treasury assumptions were that house prices are expected to drop 14% in 2009 and 4% in 2010, in the baseline scenario. A worst-case scenario assumes a 22% drop this year followed by a 7% decline in 2010."

We say each number has to line up with each other and while we do not doubt the excellence of Treasury’s economists, these numbers seems to reflect a back room political compromise. If they told us the real numbers, we would all have a heart attack. This is exactly what happened to TARP, we suspect. There are not enough trillions of dollars to buy all the bad paper, and there are not enough trillions for stimulus and homeowner aid to keep GDP at only a drop of 3.3%.

But if they told the banks to estimate outcomes on a drop in GDP by 5-7% for three years running and the attendant unemployment and housing price numbers, we' all go crawl under a rock. There are times the government wisely does not tell the truth, and this is probably one of them.

Warren Buffett said over the weekend that the economy will be "in shambles" this year. We believe him. But if the robust US will be in shambles, imagine what condition other countries will be in. The US is still the least-bad and the US dollar is prettiest pig in the herd and it is not the time to buy Euros yet.

Pounds to US Dollars = 1.4029
Pounds to Euros = 1.1149
Euro to Pounds = 0.8965
Pounds to Australian Dollars = 2.2217

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

We wonder if confidence in the UK government is coming back

2009-02-26T09:48:00.000-08:00

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
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

zombie banks

2009-02-25T11:01:00.000-08:00

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

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

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

2009-02-24T08:53:00.000-08:00

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!
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

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

2009-02-23T05:56:00.000-08:00

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

Contact IMS Foreign Exchange + 44 207 183 2790

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

2009-02-19T07:48:00.000-08:00

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

2009-02-18T09:05:00.000-08:00

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.

2009-02-17T07:21:00.000-08:00

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.

2009-02-13T08:12:00.000-08:00

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

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

2009-02-12T07:02:00.000-08:00

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
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Pounds to US Dollar rate rallies as things are worse elsewhere

2009-02-06T07:24:00.000-08:00

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
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Factors for the euro exchange rates decline

2009-01-30T09:30:00.000-08:00

Foreign Exchange - US Dollar, Euro and Pounds Sterling Outlook,

The US dollar exchange rate rose yesterday across the board - but only fractionally against the yen - on a flood of bad economic data just about everywhere and US stock indices falling back. Oil fell, too. It might be fairer to say the euro exchange rate was the center of attention rather than the dollar exchange rate, since the euro fell against the pound, yen and Swiss franc as well as the US dollar.

Factors for the euro exchange rates decline included its failure to reach beyond the early high around 9 am yesterday at 1.3179 to the previous day's high at 1.3328. Around noon the euro made a big jump down from 1.3079 to 1.2930, breaking the previous day's low, and then it was all over for technical traders - they had confirmation, however simple, of the next direction.
We don’t have the timestamp but evidently George Soros told an Austrian newspaper (Der Standard) that the euro may not survive unless the EU pushes for a global plan to deal with toxic debt. Bloomberg picked up the story and it apparently scared a sizeable amount of risk aversion back into market sentiment. Actually, Soros is not saying anything more drastic than the British, who are also appealing for a global solution (at G20), but such is the magic of the Soros name that traders didn’t want to be bothered with the facts. He didn’t say the EU needs a solution to its own toxic paper problem, although that is what the market heard.

Bye For Now

Barbara Rockefeller
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haraka haraka haina baraka - hurry, hurry has no good fortune

2009-01-28T09:55:00.000-08:00

Foreign Exchange : Today the US House is supposed to vote on the stimulus bill, now up to $816 billion. Then it goes to the Senate. Everybody and his brother is urging fast action.

There is an adage in Swahili, "haraka haraka haina baraka," meaning "hurry, hurry has no good fortune." Yes, the word "baraka" is the same root as Barack Obama’s name. It's a splendid adage and perfectly true. The stimulus package is likely to be a dog’s breakfast and it may not work. Even if it were carefully designed, it still might work and nobody can accuse the plan of being carefully designed. Experts don’t really know whether Roosevelt’s stimulus plans would have worked if the war had not come along. (Two recent books feature the uncomfortable fact that many of Roosevelt’s plans were really hatched by Hoover, by the way.)

But set aside doubts about the stimulus plan and even the upcoming Fed announements or the "bad bank" rumored for next week. The three big initiatives may be badly designed and may not work, but the market is starving for good news and optimism. Unfortuantely for trend-followers, optimism and a renewed appetite for risk are US dollar-negatives. The trend could be breaking.

Gee, that means we need more bad news if we want to be buy US Dollars - how bizarre is that?

Bye For Now

Barbara Rockefeller

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today the Fed starts the policy meeting

2009-01-27T08:21:00.000-08:00

Foreign Exchange : In addition to data like Case Shiller home prices and the conference Board consumer confidence index, today the Fed starts the policy meeting. We can perhaps expect two outcomes.

One is a revision of the Fed's forecasting time horizon. Retired member Mishkin said "Interest rates are no longer what monetary policy is about. A much more important part of policy now is managing expectations, and, in an environment like the one we are in now, having more clarity on inflation objectives becomes critical." In other words, we could get an inflation target but it would apply for a longish timeframe, like 3-5 years.

The other big subject is managing the balance sheet, already ballooned out of all recognition. We are pretty sure the Fed is going to buy Treasuries, in part to manage the long-term rate, but how is it going to get out of the market-manipulation business? In other words, what’s the exit strategy? We’d like to know that at the beginning, before the entry.

We say it's much too early to consider fear and more fear to be losing its grip. If bad debt really is $2-3 trillion and only $1 trillion has been disclosed and addressed, more shocks are to come. The US dollar exchange rate remains a good bet even if it’s not straight-lining anymore.

Bye For Now

Barbara Rockefeller
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US dollar exchange rate is softer at the start of the week

2009-01-26T07:19:00.000-08:00

Foreign Exchange : The US dollar exchange rate is softer at the start of the week, led by the Canadian dollar for once, as the prospect of a US stimulus plan and perhaps formation of a "bad bank" encourages less risk aversion. Both oil and hold rose strongly on Friday, too. But this week we get an overwhelming amount of new data and information, nearly all of it bad, including a flood of US company earnings reports. The market has recently retreated from panic mode - and panic favors the safe-haven dollar - but panic could or should be building again this week.

Bye For Now

Barbara Rockefeller
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US Congress discussing and passing the Obama $800 billion stimulus plan

2009-01-26T06:49:00.000-08:00

Foreign Exchange Outlook : This is a week of an overwhelming amount of information. Nobody can absorb this much information, let alone analyze it and put it into perspective. Aside from the US Congress discussing and passing the Obama $800 billion stimulus plan, nearly all the news is going to be bad. As we have seen recently, bad news is US dollar favorable because risk aversion rises.

Tomorrow is the start of a 2-day Fed meeting.

With the target rate range already zero to 0.25%, what can the Fed say to impress anyone? The FOMC needs to make a powerful statement lest anyone notice that it has run out of ammunition, presumably more talk about quantitiative easing. This will probably take the form of expanding the TALF (Treasury Asset-Backed Liquidity Program) to include not only Treasuries but also CMBS (commercial-mortgage-backed securities) or private-label RMBS (residential mortgage-backed securities), according to Market News. So far the government has not actually bought any Treasuries, let alone private paper, but we probably should expect it this week.

Also tomorrow Congress starts debating the Obama stimulus plan, which Obama wants done by the President’s Day national holiday on Feb 16, or two weeks from today. The Feb 16 holiday is a compromise date between Lincoln’s birthday on Feb 12 (also Darwin’s birthday, take note) and Washington’s birthday on Feb 22 (also USAF Col. Gary Rockefeller). We guess the stimulus debate will not be bi-partisan, judging from the Sunday TV talk shows where Republicans have one solution to everything, including athlete’s foot and the flu - tax cuts.

Also tomorrow is the start of the Davos World Economic Forum, for which the high and mighty pay a gaint fee to attend (Chf 42,500). The WSJ says 40 heads of state will attend this year, up from 27 last year, and some 1400 CEO's. Everyone will be talking about how bad conditions are and how much worse they can get, especially since the IMF is expected the next day to lower its global growth forecast to a mere 1%. The WSJ says that among the scheduled speakers is Richard Olivier, son of the late British actor Sir Laurence Olivier, who runs a motivational seminar company. Olivier says "The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one." He will compare MacBeth to Lehman Bros.

Oh, good grief.

Anyone who thinks capitalism is a myth shouldn't take the stage in the first place.

Also tomorrow is US existing home sales and the Case Shiller home price index for November. Thursday brings Dec durable goods orders, taken as a leading indicator of everything from industrial production to employment. From an economics point of view, the biggie is Friday’s US GDP estimate… and the Friday after that, the Dec payrolls number.

There probably is some good news in all this somewhere - some data last week was not bad, like the University of Michigan consumer confidence index (61.9% from 60.1 in Dec and the highest reading since Sept). But the ain’t over yet. We await other dire news, like German bank failures or the Chinese declining to buy US paper (they could buy Greece instead), and so on.

Bad news is US dollar-favorable. We do not have strong evidence of the trend failing, and the trend is our friend.

Bye For Now

Barbara Rockefeller
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Why are we not as afriad of potentially $1 trillion in toxic paper at German banks as we were on Tuesday?

2009-01-22T08:01:00.000-08:00

Foreign Exchange Outlook : The US dollar exchange rate is not through rising, and we make that assertion on the grounds that the world is not through throwing unpleasant surprises at us. Why are we not as afriad of potentially $1 trillion in toxic paper at German banks as we were on Tuesday? Besides, various coutnries could actually intervene, if not this week, with the intent of driving their currencies down and "creating" inflation. We don't expect this outcome, at least not soon, but surely what they would be buying US dollars. And on the economics front, we concur with the Confederation of British Industry ,which said today it is stunned by the sheer speed with which things have fallen apart. The economic onsequences are deep and long-lasting. The analyst who said he expects recovery in Q1 is dreaming. In short, we haven’t hit bottom yet.

More Shocks are in store, and as we have seen, shocks favor the dollar.

At a guess, though, confirmation of Geithner and upcoming announcements of bailout/recovery plans, if accepted as worthy by the market, are ironically US dollar exchange rate negative. Still, the overall trend is in place and we do not see a reason to expect it to come to a halt.

Bye For Now

Barbara Rockefeller
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Pound to US Dollar fell in a straight line from 1.4900 on Sunday night to 1.3915

2009-01-20T08:39:00.000-08:00

Foreign Exchange Outlook : The US dollar exchange rate resumed a strong rise across the board as bank and political crises erupted in the UK and Europe. The euro exchange rate fell yesterday from the high after the open Sunday night at 1.3386 to 1.3055 by the end of the day yesterday in the US, which saw hardly any trading since the banks were closed for the Martin Luther King holiday.

Overnight the euro exchange rate plunged right out of the gate in early Asian trading to 1.2986 and thence to a new low of 1.2919 after Europe came in around 3 am ET. That’s 467 points in about 30 hours. The euro rate is bouncing to 1.2954 at 7 am today but it’s not hard to read the chart—a new phase of the downtrend has started. The euro exchange rate has already retraced more than 62% of the recent upmove and talk will soon begin again of a 100% retracement of the move up from the Oct low at 1.2329.

Pound to US Dollar fell in a straight line from 1.4900 on Sunday night to 1.3915 - almost 1000 points.

Holy cow!

It’s the lowest level since 2001, on renewed disarray in the UK financial sector, with Royal Bank of Scotland needing government rescue on Monday and stocks, especially Lloyd’s, down over 30% today. The government is injecting capital into RBS but an analyst told the FT "The further losses from the combination of deflation and deleveraging will consume these additional funds, leaving equity shareholders at risk of further dilution."

The only currency holding steady is the dollar to Japanese yen, which has been hovering in the low 90's since Sunday night. Euro to Japanese yen and pound to Jpanese yen are both weaker, however. See the charts.

It seems strange to see the pound soft against the yen when the UK still has a yield advantage and a more activist central bank and treasury than Japan during its own lost decade.

Buy For Now

Barbara Rockefeller
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foreign exchange traders sold the euro to 1.3099 today on more bad news

2009-01-14T07:51:00.000-08:00

Foreign Exchange Outlook : The US dollar exchange rate rose again yesterday from 1.3282 at 8 am in New York to 1.3138 by mid-afternoon, but was already giving some of it back into the close at 1.3180. The euro exchange rate suffered yesterday from bad economic data and a dollop of worry over fiscal conditions that clearly will violate the Stability Pact and triggered ratings agency downgrades (Spain on top of Ireland and Greece), but then as the euro exchange rates fell under a critical level around 1.3250, foreign exchange traders got worried the euro exchange rate was getting oversold and the market was running out of sellers. The 1.3250 level is the 62% Fib retracement of the euro's upmove from the Oct low at 1.2329 to the Dec high at 1.4719.

Sure enough, the euro rate rose overnight to 1.3338, but when Europe took the trading baton from Asia, foreign exchange traders sold the euro anew to 1.3188 again, not quite matching yesterday's lows but having the virtue of creating a new hand-drawn resistance line on the hourly chart (at 1.3310). Reasons for the euro to dip again include a false rumor that Ireland was already going to the IMF (it's only threatening) and German GDP, which came in at 1.3% for 2008 when 1.4% was forecast and in contrast to 2.5% in 2007. Adjusted for working days, German 2008 growth was a mere 1%.

Sterling, dollar to japanese yen and euro to Japanese yen made a similar small corrective bounce. The correction may not be over, alas, and could turn into a bigger upmove - depending on what the ECB does and says tomorrow. Right now we think it’s a minor event but foreign exchange traders have their chaps and spurs on, and are ready to ride a bucking horse.

Bye For Now

Barbara Rockefeller
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UBS, which repeated yesterday that the euro exchange rate will fall to 1.2000 by year-end.

2009-01-13T06:36:00.000-08:00

Foreign Exchange Outlook : As we wrote yesterday, a decline was the euros manifest destiny even as it was rising last week because it was inevitable that the ECB would not stand apart from the rest of the world, clinging to an outdated anti-inflationary stance in a disinflationary world. This was and remains the persepctive of major Foreign Exchange market players like UBS, which repeated yesterday that the euro exchange rate will fall to 1.2000 by year-end. The forecast itself from such an important name becomes a factor in its own right. Even if the ECB stays on hold or cuts by only 25 bp, the bank says, expectations of cuts next time will get built in. "Thus the euro rate is likely to remain a sell on rallies against both the dollar and the yen."

We say this is exactly right.

We expect an ECB surprise on Thursday. ECB chief Trichet said "this is no time for complacency." The current challenges are pressing and new challenges will arise. He was (evidently) talking about a "firm and credible implementation of the EU stability pact," i.e., fiscal restraint, but Trichet is a really smart guy and he must know that to complain about overspending (Germany will break the pact in 2010) is spitting into the wind. We expect Trichet to make some critical comments accompanying the rate decision.

In the background is some chatter, mostly from the lunatic fringe, about some countries being forced to leave the EMU (Italy, Greece, Spain, Ireland are the most-cited names). We say it's much too early to be thinking along these lines, let alone making trading decisions based on such speculation.

For one thing, there is literally no mechanism for a member to leave the EMU.

Nobody knows how that could be accomplished. Having said that, there is an explicit deal that the EMU will not rescue a failed member, either. This is not so odd - New York State doesn't have to step up and rescue Massachusetts, either. Still, stress on certain names is generally euro exchange rate negative, although Bank of New York economist Woolfolk says that a weak country leaving the EMU would be a euro exchange rate positive. Well, no. While pan-European integration has hardly been a full-scale success, leakage from a failed economy could be substantial, from loss of export sales to immigration. We think the EMU would indeed come up with a rescue plan… but for whom? Spain yes but Greece no?

Back in the broader market, there's almost too much data this week to keep it all straight, but we must pay attention to Bernanke's speech at the London School of Economics today. But again, it almost doesn’t matter what he says because "it's worse elsewhere." See all the grim data above in the UK, Germany, Spain (ratings). We have the secret weapon of Obama, of whom far too much is being expected… but he is our secret weapon all the same.

Nobody else has an Obama.

Nobody else has a federal structure, either.

And finally, nobody else is willing to experiment as wildly as the US, badly managed as it seems to be. Keep the faith - the US dollar exchange rate is on a roll.

Note to Readers: Next Monday, Jan 19, is Martin Luther King Day and a national holiday in the US. The market is closed and we will not publish any reports. The next day is the Obama inauguration, yippee.

Bye For Now

Barbara Rockefeller

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

2009-01-12T09:05:00.000-08:00

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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But overnight the price of oil rose 85¢ to $43.48 on the Lebanese attack on Israel

2009-01-08T06:15:00.000-08:00

The Feb NYMEX oil contract closed at $42.63, down substantially from $48.58 the day before and under the 10-day and 20-day moving averages. The WSJ says the 12% drop is the biggest single-day drop in percentage terms since September 2001. One factor was the US dEpt of Energy report showing crude inventories rose 6.7 million barrels last week, many multiples of the forecast. The amount of oil stored at the Cushing,

OK delivery terminal rose to a record high, too, showing weak demand.

But overnight the price of oil rose 85¢ to $43.48 on the Lebanese attack on Israel, the fear starting to grow that a pan-Arab alliance could grow against Israel and ultimately get reflected in a 1983-style embargo for Israeli allies. We say the probability of such an outcome is low. The miscreants are fringe groups, even if they hold power or high influence in Gaza and Lebanon, neither of which is an oil producer and both of which are failed states The question is whether real states want to make trouble and join up with these losers.

Bye For Now

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

2009-01-08T05:35:00.000-08:00

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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Europe just starting to feel the pain already much in evidence in the UK and US

2009-01-08T02:08:00.000-08:00

Foreign Exchange Outlook : The market is flirting with a return to risk appetite that is most visible in price rises in some commodities (copper, oil) as well as equities. At the same time, traders are girding their loins against really bad economic data, of which Friday’s payrolls is the most important. Market News reports the median number in its survey is a drop of 490,000, with a forecast range of 450,00 to 567,000. This comes after 533,000 job losses in November and 320,000 in October.

Offsetting the economic gloom is a rising sense that a can-do Obama administration really can create growth in some areas and that the reduction in fear is itself a pro-growth factor. Market News reminds us that when Reagan came into office in 1981, the US Dollar Exchange Rate was just coming up off a crisis level of 1.7250 against the DM. The previous Oct (1980), Fed funds had reached 20%--remember Mr. Volcker? While the US Dollar was already rising off the lows of the 1980 year when Reagan took office, he gets credit for the can-do attitude, even if Reaganomics had very little valid underpinning. Persisting today is a near-worship of Reagan by some but even those who thought the supply-side ideas were dumb have to admit that sheer attitude and the force of Reagan’s personality and charm were effective in restoring confidence. (He could also construct a whole sentence, too.)

Foreign Exchange Analysts point out that it’s impossible to untangle the psychological factors and the "real" economic and market forces at work. We say three things are critical. First is Obama convincing foot-draggers in Congress to shut up and go along with his plans. He will make a major speech tomorrow on recovery initiatives.

The second is greater confidence in the institutional infrastructure. The Fed's US mortgages market actions are already seen as a huge success two days into the initiative, if not grabbing headlines in the financial press just yet. Now we need success like this on every front, including the SEC. Numerous articles are appearing reviewing what happened, who or what is at fault, and how to prevent it next time. A lingering worry is that the guys who got us into the mess (Geithner, for example) are still the guys in charge of getting us out. We need to see a change in mind-set and not just personnel.

The third thing is perception of "how much is enough." This is one of the lessons every junior banker learns in credit school - is the borrower asking for the optimum amount of money to make the new business plan workable?

Right now it looks like the Obama plans will encompass $1-2 trillion, with $775 in stimulus spending and $300 billion in tax cuts (so far), on top of the $700 billion in TARP money plus whatever the Fed is doing.

Is that enough?

If the markets perceive that it is, they will open their wallets. A ton of money is sitting on the sidelines. In particular, corporations are stuffed with cash and refusing to invest in capital spending. So we not only need to see corporate bonds become acceptable paper again, we need to see corporations spend some of their own money.

Nothing spells confidence like capital spending.

We say that tax and other incentives to boost capital spending (as opposed to consumer spending) are the key to the success of the Obama plans. If tomorrow we start getting confidence in this aspect of the recovery initiatives, the payrolls number the next day will lose its sting. Yes, this means we think the psychological factor (returning confidence and hope) can outweigh bad data. The psychological factors are forward looking while the data is, by definition, backward-looking. Markets like to anticipate, and none so more than the Foreign Exchange market. With Europe just starting to feel the pain already much in evidence in the UK and US, hope is more likely to arise on this side of the Atlantic. So far Asians seem to be willing to believe in the Fed, and let’s face it, Asians are the ones with the money these days. Meanwhile, Middle East sovereign wealth funds and other official and semi-official asset managers are licking their wounds and watching the oil price fall—but they will be back someday, if only because of the dearth of safe investment opportunities in their own region.

Now let’s look at the calendar. Jan 19 is a national holiday in the US and the inauguration is the next day (not a holiday). Analysts say mid-Feb is the earliest we can expect Obama initiatives to hit the streets, but we guess the can-do effect will hit before then. This could be wildly US Dollar - favorable.

We just need this dratted correction to end first.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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falling oil prices that set the stage for the us dollar currency recovery

2009-01-06T09:04:00.000-08:00

The Feb NYMEX oil contract closed at $48.81 from $46.34, breaking the 20-day moving average to the upside as well as the linreg channel top. This is quite frightening since it was falling oil prices that set the stage for the us dollar currency recovery. Overnight it went to $50.04, not seen since Dec 15, on reduced Russian supply of natural gas to not only the Ukraine, but Southern Europe, too. The FT names Turkey, Bulgaria and Romania. Oil is the alternative. Separately, Bloomberg reports that Kuwait and Qatar plan to cut oil shipments to Asia starting in January, fulfilling the cuts promised at the OPEC meeting on Dec 17.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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Buy US Dollars - Even the strongest rally doesn’t move in a straight line

2009-01-06T08:22:00.000-08:00

Foreign Exchange Outlook : We get some US data today, including the ISM service sector index for Dec (probably a decline to 36.5), existing home contracts, factory orders, and the minutes of the Fed Dec 16 meeting. The Fed minutes will be interesting because they will disclose the reasoning behind taking rates to a range of zero to 25%. Today is also probably the day that Friday’s payrolls come onto the radar screen.

Still, the overriding factor is the ECB rate cut now universally expected next week and the associated rhetoric as well as the amount (25 bp or 50 bp) and the pace of future cuts. Bloomberg reports that ECB policy member Constancio said yesterday (before today’s inflation numbers) that the bank is prepared to cut interest rates if necessary to keep inflation on target. If price growth slows below the goal of "just below 2%," the bank will respond with rate cuts. This is nothing more than confirmation of what we already know, but central banks have their own intricate dance with the market and it's necessary for the bank to disclose its intentions out loud. We can’t wait to hear from the BBK's Weber. As for the extent of cuts, Bloomberg says its survey shows ECB rates down from 2.5% to 1.5% by end-June, or a total of 100 bp in cuts. We think the market may reward the euro exchange rate with a bump up if the first move is a biggie, at least 50 bp.

Also, we need to look at two intermarket factors, the rise in US 10-year note yields and the price of oil. We are seeing a rise in yields and steepening of the yield curve in part on hope that the Obama team can drive recovery. As a general rule, this is US dollar rate - favorable. But not to the mind of former Bank of England policy committee member Buiter, who says Americans must prepare themselves for a "massive collapse" in the dollar as investors around the world dump US assets, according to a piece in the Telegraph newspaper. This is a tabloid newspaper that loves shocking headlines, although Buiter is a reputable source. Buiter says there will be increasing disenchantment with the US economy and thus an exodus of foreigners.

Well, probably not. Recently both the Japanese and Chinese have affirmed that they will continue to buy US government paper for reserves, even though China has already said Q4 reserves will show a drop because of the dollar's decline late last year. Some forex analysts say this is no big deal - these reserve managers have a distinct lack of other good assets to choose from. Even European bonds are not a real alternative to US paper since the European bond market is made up of individual country paper and some of it is getting the benefit of the doubt from the existence of the euro exchange rates and not because of good underlying fundamentals (like Italy). We are inclined to accept the no-good-alternative argument. If Buiter were right and the dollar exchange rate gets dumped as the Treasury holds auctions and nobody comes, the global financial system would face a bigger Shock than anything we have seen so far. We may not like it, but as goes the US economy and the US government bond market, so goes the rest of the world.

Oil is a more immediate and pressing problem. We complained all last year that the inverse correlation of the dollar and oil was silly (beset by circular reasoning whereby oil traders said they were buying oil as a speculative asset because the dollar was falling and currency traders said the dollar was falling because oil was rising). This correlation is not a necessary one—we have had periods when the dollar and oil moved the same way and not inversely. But the speculative psychology could easily come back and give us wildly higher oil prices, and perhaps a wildly lower dollar, on very little evidence. We still want to see greater regulation of the oil market in some way - when oil is treated as a financial asset and not a commodity, it becomes less linked to valid supply and demand determinants and takes on the irrationality of financial markets. Oil is too important to be controlled by greedy, nasty yuppies at Goldman Sachs. But critics are right that regulating this market may cause more trouble than it cures. Who exactly would be qualified to do it, and how? Net-net, we see oil as the biggest threat to the dollar rally, not US economic fundamentals (and we are not certain that the Obama rescue plans will work in the first place).

Finally, today is Tuesday and we often get a pullback on Tuesdays, or so market lore has it. Even the strongest rally doesn’t move in a straight line. But keep the faith - it’s a true new trend and unless something comes along to derail it, we have more time to enjoy it.

Bye For Now

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

2008-12-04T08:43:00.000-08:00

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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risk aversion is rising and rising risk aversion is dollar exchange rate favorable

2008-12-03T06:50:00.000-08:00

Foreign Exchange Outlook : The USM service sector report is due today, probably a drop to 42 or the lowest since the index was invented in 1997. We also get the ADP Macro forecast of private sector jobs ahead of Friday’s critical payrolls report. This is oddly not much on the radar screen yet, even though on Monday the DJ Newswire reported a median estimate of 200,000 jobs lost. Potentially disturbing is a story in the WSJ asserting that Paulson is thinking about asking for the other half of the 700 billion in TARP money authorized by Congress. Originally his idea was to leave half of it for the incoming Obama administration. He would act next week if he acts at all (he leaves for China today or tomorrow, a wasted trip if ever there was one). This raises the question of what Paulson knows that the rest of us do not.

We hate to say it, but if stocks are down today, that implies risk aversion is rising and rising risk aversion is dollar exchange rate favorable. Bah. This is no way to run a currency market. With average daily ranges shrinking and little directional guidance, we have to expect a breakout at some point - but probably not today. We may have to wait for Friday’s payrolls for that, unless tomorrow’s rate cuts do the job.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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Australia and New Zealand Dollar, the prospect of rate cuts is currency-negative this time.

2008-12-01T10:25:00.000-08:00

Foreign Exchange Outlook : As we have been emphasizing, one major reason for the US dollars firmness during this crisis is "it's worse elsewhere," making the dollar a safe haven. The news from the UK is particularly dire. The Reserve Bank of Australia, Bank of England and ECB are all expected to cut interest rates this week, a move that traditionally weakens a currency but recently has been seen as a good thing because it may unclog the credit pipes and also demonstrates responsiveness. With central banks wagging an admonitory finger on credit quality behind the scenes, it’s not clear that lower rates have their accustomed power to goose lending and activity, though.

Still, in Australia (and New Zealand), the prospect of rate cuts is currency-negative this time. After a tame inflation report in Australia, the Australian Dollar fell on the widening view that the RBA could cut as much as 75 bp to 4.5% at the policy meeting tomorrow. Curiously, the Australian stock market fell on the rate cut outlook.

Aggressive rate-cutting around the world may be a dollar exchange rate supportive factor-or may not. A lot depends on the rhetoric. Too much fear and panic expressed out loud by central banks is good for the US dollar rate, while too smug a view (by, for example, the ECB) is also good because it shows a lack of responsiveness. In short, central banks have to perform a real balancing act. The appearance of desperation is also dollar friendly via the oil and other commodity price connection. We continue to think the oil - dollar correlation is more important than any other intermarket analysis.

In the US, we get a ton of data this week, including the ISM's manufacturing sector data for Nov and a Bernanke speech today, plus the usual barn-burner, the payrolls report on Friday. The ISM report is likely to show a contraction in manufacturing for the 4th month in November, perhaps to the lowest in 28 years, according to Bloomberg. This is bad for the economy and for confidence but very nice for the price of oil resuming its downtrend.

Most of the factors are lining up for a dollar rally today and perhaps all week. We worry a little that normally dollar exchange rate negative factors are being ignored, thought. Any development along those lines (terrorism, China, payrolls) could cause a confusing halt in the run.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

2008-11-26T12:59:00.000-08:00

Foreign Exchange Outlook: At last the Treasury and Fed have launched an initiative that the market likes and is responding to. At last the government is doing something about housing directly and not indirectly through credit default swaps or capital injections to banks. At last the government is listening to the market, since the structure of the TALF was something proposed by player (according to Market News). This is tremendously good news. Unable to force banks to lend—the one big missing ingredient in the Citi bailout and the earlier capital injections-the government has found a way to "incentivize" the banks. And it took only three months, if we count from end-August. For a country as big as the US with so many conflicting lumps of self-interest, this is actually not too bad.

Ironically and perversely, though, a workable initiative is dollar exchange rate negative, since it means global risk is down and opportunity is up. It’s nice to have greed plus fear back again and not just fear and fear, but some issues do remain-not the least of which is “Is it enough?”

We may get a hint today in the form of personal income and spending, with spending expected down a big 1% after -0.3% in Sept, according to the Bloomberg survey. Who ever heard of the US consumer reducing spending? We say the UK is about 9 months in front of the US on this and many other fronts. Household spending fell to a multi-year low in the UK and we probably have to expect it here, too. We also get data on durable goods order, new home sales and consumer confidence.

The other big factor is prospective interest rate cuts in the UK, Europe and US in December. Remember that rate cut were a currency favorable event in Australia (with the Australian Dollar exchange rate ralling) and the UK a few weeks ago, since they showed "responsiveness." If the ECB is seen as recalcitrant or dragging its heels, the euro exchange rate could get punished for that lack of responsiveness more than rewarded for having a favorable yield differential. (Foreign Exchange Traders dont need a reason to Sell Euros at the moment)

This is a topsy-turvy world.

Similarly, Foreign Exchange Traders will buy pounds if the Bank of England is aggressive, as seems likely. We are holding to our story that all the bad news is not out yet and any fresh instance of systemic failure will fall to the US dollars favor. This includes a retreat in equities, renewed weakness in commodities (especially oil), a big bank failure somewhere (anywhere), and so on. This doesn't even include all the terrible things that can happen in the political or natural world-riots, assassinations, earthquakes, and the like. It seems improbable that a giant rate cut in China will restore everything to conditions before. In fact, we think it really is a new era.

Downsizing is serious business.

We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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the US dollar is not a dead duck

2008-11-25T10:12:00.000-08:00

Foreign Exchange Outlook: Risk aversion could come flying back in the window when we get two bits of data this morning, the Q3 GDP revision (8:30 am EST) and the Conference Board consumer confidence index (10 am EST). GDP will likely be rived from -0.3% to -0.5%, while the confidence index was probably steady at 38 in Nov, the same as Oct, according to the Bloomberg survey. This is not a deterioration but still the lowest since records began in 1967.

It’s notable that while we all hear Obama talking about infrastructure spending as a big component of the stimulus package, focus remains on the consumer. Even the finance guys at the Fed and Treasury moved from saving their buddies at the banks first to consumer credit second (not the housing sector, which would have been more logical). But consumer spending is not going to get us out of this thing. The only way for that to have been true would have been Helicopter Ben throwing $24,000 out of the sky for every person in the country. The Obama approach calls for the industrial sector to be revitalized by government spending, whether it’s wind farms or road-building.

This could be the post-industrial industrial revolution. Nobody has the slightest idea what it will look like, but given technology advances, it will probably result (in five-ten years) in a tremendous increase in labor market productivity. We tend to think of productivity as how many widgets a worker can churn out in an hour, but in practice, the US is a service economy and it runs on trucking. Better roads and bridges, together with an improved national electrical grid, are a tremendous injection of value into the economy (buy UPS and FedEx). Besides, it will be fun to see whether it’s really true, as we saw with Eisenhower’s interstate highway system, whether government is sometimes the solution and not always the problem, the old Reagan mantra.

This is to a certain extent the basis of the new optimism - one way or the other, all these experts, under Obama’s leadership, will fix things. Well, no. These are the same experts who may have warned us of impending doom but failed to get action (Summers) or to instigate action (Geithner). It ain’t over yet and nobody can even tell us what inning we are in. It’s the proverbial black swan situation and optimism-in the form of giant stock index rises-is unwarranted. We believe in trends. The Dow was up but has not reached red resistance. It could be an aberration. The same thing is true of oil, although gold has a pretty scary chart-two gap openings in a row.

Assuming more dismal new releases are out there waiting to hit us over the head with some calamity or another, the US dollar is not a dead duck. As noted above, the case for the dollar exchange rate demise has not yet been proven. We do not doubt that it will be one day, but not yet. Keep the faith.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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We guess the US dollar will survive this round, too

2008-11-24T07:02:00.000-08:00

Foreign Exchange Outlook : Everyone is looking at institutional factors like the Citibank bailout and hardly anyone is looking at macroeconomic indicators, but today we get existing home sales, probably a drop by 3.5% to an annual pace of 5 million. It will be the biggest monthly drop since Sept 2007, according to the Bloomberg survey. In the absence of a plan to stabilize the foreclosure rate and housing prices, the focus is in institutional failure rather than the economic consequences of the data itself. This is US dollar exchange rate negative. But can it be overwhelmed by an Obama spending plan due this week? Yes, but perhaps only temporarily. Spending itself is not enough you need a wide, deep and intelligent plan that everyone can believe in. Already we are seeing “anti-Keynesian” diatribes. Poor Keynes. He is getting blamed for a lot of things he never said or recommended. He did not say "spend your head off, debt doesn’t matter." Of course debt matters.

Without going further down that ideological road, consider the advice from some currency gurus who say “buy currency of creditor countries (like Japan) and sell the currency of debtor countries (like the UK and US).” This is like buying stocks of companies whose book value is greater than their stock prices. But countries don’t have book values. What counts is not the balance sheet, but the ability to generate cash. And here we have to consider not only the government and its ability to tax, but also the ability of private institutions, mostly banks, to generate the cash to pay the monthly bills and survive one more month. In the US, the TED spread (the 3-month Treasury rate vs. interbank LIBOR) is widening out again to 216 bp (according to Bloomberg), from the low in May of 76 bp and the worst-case high of 464 bp on Oct 10. The Fed is making funds available to just about every central bank in the world, including the Swiss and the Mexicans, but who comes first? US banks.

Longer run, the US printing all that money is an evil thing that will come back to haunt us. But in the immediate futures, like this week and next, it’s a powerful argument for the safe-haven status of the US to continue. Institutionally, perhaps the US doesn’t deserve the crown of safe-haven. The US is blundering badly. But in this matter of the crisis, it is still the leader-liquidity comes before solvency. We can worry about credit quality later.

How much money are we talking about? Bloomberg added up all the government programs and arrives at a figure of $7.4 trillion, or about half of US GDP. “Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.” The bailout includes the $700 billion in TARP; $2.4 trillion in commercial paper; $1.4 trillion from the FDIC to guarantee bank-to-bank loans; $29 for the JP Morgan takeover of Bear Stearns; $122.8 billion in addition to TARP allocations for AIG, and now $20 billion directly to Citi plus $306 billion of government guarantees for troubled mortgages and toxic assets.

Bloomberg writes “The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to CBO figures. It could pay off more than half the country’s mortgages.” Moreover, the Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion-this is what we should be worried about, not the $700 billion in TARP. Bloomberg is miffed because the government won’t disclose the collateral taken, with Bernanke calling it “unproductive” to disclose it.

It goes without saying that this is the biggest bailout ever, dwarfing the Chrysler version, the steel companies, the S&L’s, etc. Is it quibbling to ask whether it’s “investing” or “spending”? Probably not, since the rule of deleveraging together with bad credit quality means downsizing, i.e., permanent losses. We are all going to be made poorer by this, but in the end, what counts is the ability of the US government to sell the paper to get the money it needs to save Citibank and all the others. Can we do it? Yes. Britain is neck-and-neck on aggressive stimulus and other plans. Paulson did a bad job but the job is getting done. We guess the US dollar will survive this round, too.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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US Dollar and consumer spending is about to fall off the cliff

2008-11-18T05:41:00.000-08:00

Foreign Exchange Outlook : We don’t like it that stock markets are the dominant factor in the currency market. It makes for weird effects and puts hard economic data and a sane perspective on the economy in a secondary position. This week we get a plateful of data, including PPI and CPI for October, along with the NAHB housing market index and Philadelphia Fed survey for November. But if some important company reports bad earnings, even good numbers would be overshadowed. It’s dumb and it’s dangerous. The one thing it may prevent us seeing in deflation in the US, as in the UK.

Deflation and fear of deflation has a funny effect on people. We simply do not understand a world in which prices fall, companies fail, and GDP contracts. Most of all, we don’t understand it when the US consumer stops consuming but if the outlook for employment is as dire as we see in the Empire State report yesterday, consumer spending is about to fall off the cliff. The domino effects reach into the darkest corners of the world.

This morning we get the Treasury report on capital flows for Sept, which was the evil month in
which Lehman was allowed to go under. The August report had shown an outflow of $400 million after an outflow of $33.6 billion in July, despite an increase in foreign purchases of long-term Treasuries and repatriation by US investors. Market News notes that over the past five years, US investors bought nearly $1 trillion in overseas stocks and bonds, more than in the previous 25 years, so there remains a lot to come home if that is what is happening. Some strategists say this is the important factor behind the US dollars rise.

For reasons we don’t like, the dollar exchange rate is likely to do okay in the near future. For some reason, the US dollar is not being punished for incompetent government. As long as stocks continue to slide and scare everybody, the US dollar is a safe haven. And in the perspective of “it’s worse elsewhere,” we have yet to see the worst occur in places like China and other emerging countries. India is still forecasting high growth next year, for example. These guys just don’t get it. When the US sneezes, the rest of the world catches not a cold, but pneumonia. At what point do we see geopolitical unrest arise because of slumping economies? If history is any guide, India and Pakistan should pick a fight with one another any day now.

Another factor is oil. Many countries have said $60 is the breakeven point at which social programs and subsidies have to be cut. Indonesia and Malaysia have already seen turmoil over this issue-what about Venezuela or Mexico?

Those who are long dollars should be careful what they wish for.

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Barbara Rockefeller
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BNP Paribas has a forecast of euro to dollar exchange rate to go to 1.07 by the end of Q1. Holy Toledo!

2008-11-17T06:20:00.000-08:00

Foreign Exchange Outlook: The rest of the world is falling into recession faster and bigger than the US, which is to blame for the trigger events that started the recession in the first place. (Talking-head TV pundits said over the weekend that a lot of fingers were pointing blame at the US at the G-20 meeting.) The National Association for Business Economics says the US will still put in growth of 1.4% in 2008, sliding to a contraction of 0.2% in 2009. Compare to the UK with a peak-to-trough of 2.5%. On the quarterly basis, Q4 will contract at an annual pace of 2.6% and in Q1, by 1.3%-but then the US will resume growth of 0.5% in Q2. This improvement will mirror recovery in real estate/housing. Really? This implies the worst is nearly over. We'd have only 4 months to go (to Q2 next year). This must assume GM doesn’t blow up and that the Obama stimulus/rescue plan is really big and really successful (whatever it is) and that oil prices remain low and a few other assumptions that are probably unrealistic.

We get a dose of cold water today with the Empire State index from the New York Fed, probably a drop to -26 from -24.6 in Sept, according to the Bloomberg survey.

But again, conditions elsewhere are worse than in the US. The ECB next meets on Dec 4, with opinion wildly divided on whether itthe ECB will cut interest rates. IMF managing director Strauss-Kahn said the ECB has room to cut rates. He told the BBC "In some parts of the world--Japan, the United States--interest rates have been cut very much, but it can be done more aggressively in other parts. I think now [the ECB has] room to decrease the interest rate, but nevertheless the stress has to be put on fiscal policy." This presumably means each country has to give up fiscal prudence. But we thought that was already a given--?

With the market seeing rate cuts as the right thing to do and not a currency-negative, we are faced with the perverse idea that if the ECB doesn’t cut in Dec, the euro exchange rate will be punished. This seems backwards of the usual response to rate cuts but it has justification today. Cuts are virtuous and refusing to cut is pig-headed. So did Strauss-Kahn give us a clue? Yes, maybe, that Trichet and/or the policy board are reluctant to cut a second time in as many months out of fear of looking panicky or some other reason. Watch for additional news about the ECB attitude toward a cut. If the policy board is looking reluctant, the euro rate can drop another 500 points. In fact, general sluggishness on the European front is inspiring some wild forecasts of a crashing euro. BNP Paribas has a forecast of euro to dollar exchange rate to go to 1.07 by the end of Q1. Holy Toledo!

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Barbara Rockefeller

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Net-net, the US dollar Rate is at or near a turning point. It seems to be holding ground against the euro, pound and yen

2008-11-05T06:17:00.000-08:00

Foreign Exchange Outlook : We get the US service sector PMI this morning, probably a drop to 47 from 50.2 in Sept for the 6th drop in 10 months, according to Bloomberg. We say the big picture will dominate today rather than data confirming the US slowdown. The big picture includes the reception of the US Treasury refunding, political things like Obama’s choice of TreasSec and/or intentions to propose a stimulus plan right away, and the new perspective on rate cuts.

Rate cuts first: The Australian dollar was rewarded with a rise after the Reserve Bank of Australia cut by more than expected. This is the opposite of the usual response under normal conditions. Commentary from the UK indicates that a larger-than-expected rate cut by the Bank of England tomorrow, even as much as 100 bp, would be sterling-favorable because it shows the government to be "pro-active." The market has priced in a 50 bp cut, but of 60 economists surveyed by Blomberg, 8 expect 100 bp and 6 expect 75 bp. A UBS analyst writes “In times of economic stress markets may become more concerned by future growth rates as a driver of future returns than movements in cash rates.”

Evidently a global recession/possible Depression is sufficiently well-appreciated that rate cuts are seen as foreign currency supportive.

Might the same thing happen to the euro exchange rate tomorrow, and might the market be expecting just that response? Yes. Also, the following day we get the US payrolls report, expected to be bad but perhaps not fully priced in yet. We think the euro downtrend looks safe, but on the intermediate chart (360 minutes), the euro exchange rate is pressing against the linreg channel top and we need to see a level under the last intermediate low (1.2523) to feel confident. It’s not unheard of for a currency to move that much in two days, especially given the wild swings lately. In fact, the current average daily true range is 158 points, so over two days we could easily reach 1.2500. But everything has to go right for the us dollar to achieve the 1.2500 level before the mud hits the fan early Friday morning in the form of payrolls.

The Obama Effect: We may not hear before then of any Obama stimulus plan in the remaining months of the current Congress. (Congress remains out for another two weeks but technically has two months after that). The Obama plan is probably a $175 billion package including outright subsidy checks to consumers (which didn’t work all that well in April), a tax credit for job creation, and a big public works initiative - roads, bridges and schools.

Should we be worried that an Obama plan will also contain Hooverish measures against free trade or reactionary unionism? Probably not.

His advisors include former Fed chair Volcker, former TreasSec Summers, Warren Buffett, George Soros, and former TreasSec Rubin, who has said Obama understands that any government, especially one proposing big spending, needs to announce a commitment to long-term fiscal discipline. Failure to do so undermines the bond market and the dollar exchange rate. This was Rubin’s stance in the Clinton administration and he was right. As far as we know, Obama takes expert advice like this.

A funny monkey wrench is the works is the upcoming (Nov 15) summit of G20 in Washington, proposed by French Pres Sarkozy and hijacked by Bush. We expect nothing to come out of this meeting but hot air.

Net-net, the US dollar Rate is at or near a turning point. It seems to be holding ground against the euro, pound and yen, but not against the "riskier" currencies Australian Dollars and Canadian Dollars. If hope rises of a US recovery via Obama or anything else, the Australian Dollars and Canadian Dollars upswings will continue as risk appetite comes roaring back.

Does this lead the others?

Possible.

Ironically, the prospect of recovery in the US can be US dollar negative.

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Barbara Rockefeller
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Foreign Exchange Outlook

2008-11-04T08:22:00.000-08:00

Foreign Exchange Outlook : The US dollar has two big black clouds hanging over it. First is the election and then there is payrolls.

Today the US election is everything. If it’s an Obama landslide and/or if there is no dispute over the fairness of the counts, that would remove a black cloud hanging over the dollar from the last election. We also want to hear right away - this week - the name of the incoming Treasury Secretary and some broad outlines of the financial plan. A $1 trillion budget deficit is very big dollar exchange rate negative. Assurances of an effort to balance the budget would go a long way, even if they are not really credible.

Once the election is over, attention will turn immediately to ADP’s forecast tomorrow of the payrolls numbers on Friday. Market News gets a survey average result of a drop of 200,000 in Oct, but estimates range from –85,000 to –230,000. The jobless rate, the worst fiction in the data pantheon, will probably rise from 6.1% in Sept to 6.3% but perhaps as much as 6.4%. Realistically, it’s probably 8-10% already if the count were done properly.

There is a consensus of opinion from Foreign Exchange commentators everywhere on the US election. Calyon wrote "We think a decisive win in the Senate for the Democrats as well a win for Senator Obama, as the polls indicate, would boost risk appetite as the risk of political paralysis will be reduced going forward.” Separately, UBS says the focus will shift to the "transition between administrations and how the president-elect handles the growing budget deficit."

Let’s say McCain wins and payrolls show a gigantic drop of 230,000 or more. The US dollar exchange rate would be toast by noon on Friday - to the recent high of 1.3298 - on the prospect of more shooting wars, endless deficits, and probably a disputed vote count. Can an Obama win offset really bad payrolls data? Yes, maybe. If Obama wins, the US dollar has a real chance of proceeding on its upward trend on "fundamentals" other than the safe-haven flow from deleveraging, or "forced liquidation," as Jimmy Rogers puts it. In other words, the US dollar would get a positive reason to be firm rather than a negative one. As we all know from the Economist’s poll and other surveys, the world would vote for Obama if it could. This is just a funny tidbit except in the context of confidence in US management of the economy and thus potential capital inflows.

We could name a third black cloud - Crude Oil.

With a new embrace of risk and stock markets generally unwilling to accept the recession/deflation/Depression scenario, it’s possible that oil stops falling. It’s hard to say how big a factor this might be. To sell dollars in a knee-jerk “because” oil is rising sounds stupid, but some folks do it. At the least it can have an effect for a few days. A bigger effect is on the US current account deficit (remember that?). We need oil prices to fall to avoid another round of twin deficit talk.

Even with falling oil prices, the current account deficit has structural characteristics that make it slow to fall. And with the appetite for a doubling of long-term debt unknown (hence talk of revising a 3-year note to bridge maturities), the US could actually face funding difficulties. The Treasury capital flow report has not been dollar exchange rate friendly lately, although it’s distorted by emergency cash–raising, revulsion from Freddie/Fannie, and the like. But in the Big Picture, the US needs to show progress on the current account if funding needs are doubling. It’s not clear how that can be accomplished. Again, we have to say that longer-term, it’s all too easy to make the case against the dollar. But in the meanwhile, keep the faith. Things are worse elsewhere.

A big bad Event can easily restore the US dollars fortunes, and if we have learned anything over the past year, it is to expect surprises

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Barbara Rockefeller
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The US dollar will continue to benefit from the financial market crisis

2008-11-03T06:05:00.000-08:00

Foreign Exchange Outlook : Foreign Exchange market analysts say the market will be “distracted” tomorrow by the US election but it won’t have a big effect on prices. We are not so sure. For one thing, the market likes big, decisive actions. A landslide by Obama, which is a real possibility, will be rewarded. But the longer-lasting effects of the election are yet to come. They pertain to political philosophy as much as economic outcomes, and here’s how:

We review a ton of headlines and skim hundreds of stories looking for the gold nuggets that form the basis of an foreign exchange outlook. Sometimes it’s all just noise, especially lately when it’s hard to know what is critical and what is not. The government “saving” Bear Stearns but allowing Lehman to fail was obviously a big deal but we didn’t see at the time that it would have such an enormous ripple effect. Now everyone blames the Lehman failure for consequences still coming out (like the HBOS write-down today and tomorrow’s data on credit default swaps). Today we have a tidbit from Economy.com that hadn’t sunk in yet but we now see as the single most important thing for the next 9-18 months. Here it is again: “Nationwide, 7.3 million American homeowners are expected to default on their US mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.”

With 111.16 million households in the US as of 2007, the default rate is 6.6% of all households. The number of new homeless households is 3.8% of total households. Quite apart from the effect on unemployment, retail sales, home prices and other standard economic variables, think about the effect of this many new homeless households on national health, crime rates, and the socio-political Zeitgeist.

The Far Right dislikesthe idea of a social contract-the US is a country of individualists. You can’t have individualism as your core ruling principle and then provide a nanny state, aka socialism. Bush One tried to soften this with “compassionate conservatism,” and we saw how well that worked out with Bush Two in New Orleans. Nobody doubts that if Katrina had happened in (white, Republican) Orange County, the place would be rebuilt better than ever by now. The bottom line for the US is the question of what should the people expect of government in times of crisis as well as regular times? Some things can be provided only by government, like national defense, transcontinental highways, and so on. Should the state also “take care of” these 4.3 million people who will become homeless? We say the US is about to give itself a lesson in Political Science 101. We fondly imagined this debate would end with the election tomorrow, but surely we cannot brush under the rug such a high number of homeless households as 4.3 million.

We probably need to assume that a McCain presidency would mean a policy of letting the private market solve the homeless problem. Foreign Exchange Markets basically don’t like poor people, so this simply would not work.

Assuming we get Obama and assuming he believes in a social contract that deals with 4.3 million homeless households, the turmoil is going to be horrendous. Conservatives want to prevent the “Europeanization” of America. Economists worry, too - can it be done without the price distortion and misallocation of resources that are so prevalent in Europe? In France, for example, the state requires a failing company to remain in operation to provide employment.

This is bad business and stupid public policy. Surely the US wouldn’t go that far-?

Something very big is happening.

It’s not clear what effect it will have on the US dollar exchange rate, but longer run, a Europeanized America will have even bigger deficits and without the safety net of the Maastricht Treaty and Stability Pact, not to mention the single central bank mandate of controlling inflation. We complain that “Europe” lacks region-wide institutions, hence the scattershot national bank rescue plans, but the eurozone does have that one, giant, splendid thing named “fiscal prudence.” With the world falling down around our ears, nobody much cares about fiscal prudence today, but that won’t last forever. And it can get worse. Maybe the number of homeless households is not 4.3 million but double that. Maybe the government rescue plans only delay getting the true housing market bottom and the end of bank consolidation, both prerequisites for recovery. Maybe sovereign wealth funds and others lose confidence in the US and stop buying all the trillions in new paper the US Treasury will issue to pay for it.

Longer run, you can see that we can easily make the case for the dollar exchange rate falling out of favor. In the meanwhile, falling commodity prices, impending recession worse in other places than in the more robust US, and additional shoes left to drop also outside the US all imply the US dollar will continue to benefit from the financial market crisis. In particular, we expect the emerging markets - inlcuding China - to get harder hit than anyone is now expecting.

If and when one of them hits the wall, the dollar will be the immediate beneficiary.

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Barbara Rockefeller
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Retracements in foreign exchange are not as forecastable as some technical analysts would have you believe

2008-10-30T11:54:00.000-07:00

Foreign Exchange Technical Notes : Retracements in foreign exchange are not as forecastable as some technical analysts would have you believe. We can make three or four estimates and one of them will be close to correct, but the next time, a different technique will be the right one. For the euro exchange rate, we can note that the last correction was 9/11 to 9/23 and a rise of about 870 points. The equivalent move today would be to 1.3254 by mid-November, although it looks like the level will be reached faster this time. Using the last intermediate high/low is a strong idea because we define a trend as a series of higher highs or lower lows. Breaking a high/low means the trend was broken - but not always.

We can also look at hand-drawn diagonal support and resistance, key moving averages like the 20-day, and Fibonacci levels. We would not be surprised to see an important correction like this one stop at an important Fibonacci/Gann level like 50%, mostly because everybody and his brother will be drawing them to set stops and targets.

We can also look to intermarket information and fundamentals for a clue as to when a correction will stop-or get confirmed as a new trend. Today we see oil and the commodity price index up quite a bit and since they are assumed to have a negative correlation with the dollar, that is itself a factor. Let us remind you that it’s a spectacularly unreliable one.

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Barbara Rockefeller
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We continue to think the dollar exchange rate will come back after this big and abrupt correction, which has by no means proven itself a true reversal

2008-10-30T11:10:00.000-07:00

Foreign Exchange Outlook : The Fed funds rate at 1% matches the level of June 2003 and before that had not been in force since the 1950’s. That should suffice to scare everybody, not least because we have no idea what’s next-0.50%, or zero, as in Japan? The Fed is running out of traditional ammunition. Today we must expect Q3 GDP to be a negative number. The Bloomberg survey comes up with a drop of 0.5%. As always, we have to wonder if a lesser drop would be dollar exchange rate supportive and a bigger drop even more sharply dollar-negative. This gets tricky and tangled because a bigger drop implies lower oil and commodity prices, which “should” be US dollar-favorable. The scary rise in commodity prices, especially oil, on the US rate cut is probably doomed. It’s a bad assumption under current conditions to think rate cuts can goose activity and restore growth to its old path. The old path is gone. This should be welcome because we needed to break the circular link between oil and the dollar.

The big-picture reasons to think the US dollar will not reverse trends include that the unwinding of leveraged positions is not over yet. It took about 5 years to establish these positions. Surely it takes longer than a few months to unwind them all. In fact, those who put on carry trades five years ago are not in hot water yet… raising the question of whether they need to get unwound. Besides, there are always some diehards. Even those positions that are not heavily leveraged may get undone. State Street said last week that US investments overseas total $5 trillion. Everyone fell in love with the idea of diversification, but maybe it looks less appealing today, especially in emerging foreign exchange markets.

Another big-picture idea is that US rates are now almost at rock-bottom, while Europe still boasts an overnight rate of 3.75%. As ECB chief Trichet warned, a rate cut next week is a real possibility-and the market thinks more are possible, too, for a total of 75 bp by year-end to 3%. This would give the eurozone an advantage of 200 bp, but in a global recession, higher rates are a drag, not an advantage. Besides, as we have seen, the rate for euros is no longer the key rate. Instead the key rate is the US Dollar rate among European banks, and since they won’t lend to one another, the US Fed is providing the funding, at a premium. In sum, European banks have a trust issue and can get credit only from their own central bank in a currency that the central bank does not issue. This is embarrassing and significantly lowers the status of eurozone institutions both private and public.

We continue to think the dollar exchange rate will come back after this big and abrupt correction, which has by no means proven itself a true reversal.

Faith in the US dollar is based on the same factors as before-the safe-haven bid will return with a vengeance when the next Shock hits. At this point, despite the uneven implementation of the US rescue plan, the most likely location of the next Shock is outside the US.

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Barbara Rockefeller
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We get the Crude Inventory report tomorrow, probably a sizeable build.

2008-10-28T14:50:00.000-07:00

The Dec Nymex Crude oil futures contract closed at $63.22 from $64.15 on Friday, but rose back to $64.89 and is trading at $63.86 a barrel at 9:50 am GMT on the news that OPEC may hold yet another production-cutting meeting in December. Also, the dollar exchange rate fell and Mexico has had to close two facilities due to weather.

We get the inventory report tomorrow, probably a sizeable build.

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Barbara Rockefeller
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Thursday brings the first hard evidence of recession in the US in the form of the official Q3 GDP, probably a contraction of 0.5%

2008-10-28T10:38:00.000-07:00

Foreign Exchange Outlook : Today seems to be a bit of calm before new storms, and do not doubt for a minute that new storms are coming. We have the probable bailout of the auto companies. We have potential currency and stock market intervention by Japan, Hong Kong, and others. More immediately, we have the Fed cutting rates-or not-this week, with the Bank of Japan on Friday probably following suit. In the current environment, he who cuts rates gets rewarded, not punished. Trichet already said the ECB will join. A major question is whether it’s a joint decision like last time. The markets seem to like coordinated action. A coordinated rate cut would (ironically) be US dollar-negative, because it would imply that somebody is in charge and knows what he’s doing. There isn’t and they don’t, but that would be the knee-jerk reaction.

Thursday brings the first hard evidence of recession in the US in the form of the official Q3 GDP, probably a contraction of 0.5%. The actual number doesn’t matter as much as confirmation of "recession," now no longer the official two quarters of contraction but pretty much whatever the speaker or commentator chooses it to be. The poor NBER-it lost its preeminence on this one after failing to name the last recession until after it was over.

Next Tuesday we have the US election and right afterwards, on Friday, the nonfarm payrolls for October, probably a lot more than 100,000. This week and forevermore we have massive new Treasury issuance. Meanwhile, the commodity bubble continues to deflate and China inches closer to the same global slowdown affecting everyone. The political fallout everywhere from worsening conditions trends to be authoritarian—keep the peace at any cost.

The only thing really supporting the US dollar exchange rate is flight-to-safety and panic selling of emerging market and commodity assets, whether forced by de-leveraging or by choice. This is not over and therefore we assume the dollar rally is not over. But boy, the rally faces a lot of threats, even bottom-fishing among the newly cheap assets. Keep the faith and watch the charts-the instant an intermediate top is seen in the euro exchange rate, we can buy dollars in size some more.

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Barbara Rockefeller
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This is the sense in which the credit crisis will end when house prices stop falling.

2008-10-28T05:23:00.000-07:00

Foreign Exchange Outlook : Deleveraging is a word that has now reached the mainstream. Call it what you like - capitulation, liquidation, contraction - cash is now king again. Heaven only knows how long it will take for "credit-worthiness" to be a viable concept again. Not to be overly simplistic, but if you can't lend on the word of honor of the borrower, how about lending against collateral? That works when the price of the collateral is known and there is a liquid market for the collateral.

This is the sense in which the credit crisis will end when house prices stop falling.

This gets a little tricky since we know prices always overshoot, but we may have some evidence-home sales rose 5.5% in the latest month, mostly due to unloading of foreclosed properties. The median sales price of single-family detached homes plunged from $405,000 a year ago to $239,000 last month. How much is enough? Rising sales are scattered across the country and it’s not a universal phenomenon yet… and globally, foreclosures and price drops are just starting in some places, like China.

What about other forms of collateral, like high-value manufactured goods or even commodities like gold? They gain value only when the sale price is known, as in the form of a bill of sale or receivable that can be discounted. We are back to factoring and discounted trade paper, which they had in Babylon. This is not such a bad thing but it speaks volumes about modern embellishments to the credit scene-dross, all of it.

Nothing says this louder than the ratings agency executives testifying to Congress last week. They tried to weasel out of acknowledging complicity in putting a rating on paper that deserved to be rated “zero quality.” Yes, there’s plenty of blame to go around but the ratings agencies seem the most venal, alongside the originators.

To get back to cash, Business Week reports that in Dubai’s lush luxury real estate market, lenders are requiring as much as 70% down. At another extreme, after the stock market meltdown in Japan in the early 1990’s, citizens preferred cash and postal (government-guaranteed) savings. Bankers used to go door-to-door politely asking housewives to make a bank deposit from the nestegg under the floorboards. The US is not Japan but there might be a universal human impulse to embrace risk aversion. Business Week reports that sales of home safes are up 50% in the past 4 weeks and currency in circulation is up sharply in the last month for the biggest increase since Y2K in 1999. You can see the chart at the St. Louis Fed website (http://research.stlouisfed.org/fred2/series/WCURCIR). It’s worth a quick look.

Everyone knows the multiplier effect from Econ 101. Banks need deposits to make loans, even if they were willing to make loans in the first place. Deposits are the raw material of banking. We do not yet have the rising unemployment that will contract deposits naturally, but we already have hoarding of cash. This is not healthy for GDP. We get the preliminary Q3 GDP on Thursday, probably a contraction of 0.5% (like the UK). This is going to scare people even more.

But for once the US dollar exchange rate is not suffering from the grim outlook because conditions are worse elsewhere. Bloomberg reports that the deleveraging that already began in the US and Europe is now spreading to emerging markets. "Banks have extended about $2.5 trillion in foreign currency loans to emerging markets, according to Barclays, which cited data compiled by the Bank for International Settlements in Basel, Switzerland. Some 70% of the claims on developing nations in Asia mature in less than one year, while the amount for emerging European countries is 43%."

Barclays says “The increasing difficulty facing developing countries to roll over their foreign currency loans may set the stage for even greater strengthening of the US dollar.'' A sum like $2.5 trillion is not trivial. We need to start thinking of failed states. So far we have Iceland and Argentina, but soon we will be getting the list of the others from the experts. We will be surprised by some of the names-we always are. The Ukraine, the Baltic states-and who else?

Back in the US, we have unreasoning panic starting to develop. We don’t need the government to say "Liquidate! Liquidate everything!" as the Treasury Secretary said during the Hoover years—we have individuals and the private sector doing that on their own. Pretty soon we will hear another round of blame laid at the doorstep of hedge funds, which will be unfair. Some 10,000 hedge funds hold some $1.7 trillion in assets and will have to contract to only a few hundred funds holding perhaps $300 billion in assets, but hedge funds are only the visible part of the contraction. Regular banks, regular pension funds and regular mutual funds are dumping assets, too. Again, as we wrote before, we don’t know who has the credibility and stature to bring this to a halt. Maybe Obama? But when?

Until we get leadership, the only thing to do is buy dollars and buy Treasuries.

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Barbara Rockefeller
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If you can’t earn anything in a savings account or T-bill, you might as well have gold, right?

2008-10-23T08:07:00.000-07:00

The Nov NYMEX crude oil futures contract rolled to the Dec contract, which closed at $66.75. Overnight it rose to $68.50 on talk from the Iranaians of a 2 million barrel per day cut at the Friday OPEC meeting, but the market understands demand is falling… and the price fell back to $67.17 at 12:31 pm GMT. As Bloomberg notes, prices have more than halved since the record high $147.27 on July 11. The US Energy Dept report yesterday confirmed that demand elasticity is better than anyone expected, with fuel demand down 8.5% y/y. Demand for gasoline fell 4.3% y/y.

See the gold chart. We think it was necessary to erase the upsloping channel and restore the old downchannel from the peak in March (over $1000). As with oil, we have the chicken-and-egg issue of US dollar exchange rate up, commodity price down and vice versa. As we all know to our rue, gold is not really an inflation hedge-it keeps up but does not yield anything over inflation over long periods of time. This time, it’s obvious that after the recession starts bottoming (sometime next year, presumably), inflation is likely-and then gold will take off again. But you have to wonder where the gold bugs are today-why are they not buying ahead of massive uncertainty? If you can’t earn anything in a savings account or T-bill, you might as well have gold, right?

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Barbara Rockefeller
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OPEC sabre-rattling that takes the oil price up is a splendid opportunity to short oil at a higher price

2008-10-21T09:10:00.000-07:00

The Nov NYMEX oil futures contract closed a little higher at $74.25 from $71.85 the day before on the wobblies ahead of the emergency OPEC meeting on Friday that is sure to result in production cuts of 1-2 million barrels per day. But the market is not impressed by OPEC, which always cheats-as cartels go, it’s an ineffective one. The price initially rose to $75.69 but then fell to a low of $73.12 overnight and is trading at $73.86 at noon in London.

Oil economist Jim Williams (www.energyeconomist.com) points out that many OPEC countries are already producing under quota for various reasons, including Venezuela (because it has lost production capability) while at the same time they need the money. He writes “OPEC hasn't published quotas for any country except its new members Angola and Ecuador since 2005. The primary reason for this is that Venezuela would be forced to admit that it lost over a million barrels per day of production capacity since Chavez took office. Since 2005 OPEC has styled its quota as production cuts without actually stating the numbers.”

As usual, everybody cheats. And the Saudis are the biggest producer with the highest capacity, and thus they hold the key. Williams says “The Saudis could gain some benefit from allowing prices to go even lower. A price of $60 per barrel, for example, would harm Iran and quite possibly slow Iran's nuclear progress. As we see it, the Saudis are every bit as concerned about Iran developing nuclear weapons as Israel. Lower prices are an indirect way for the Saudis to slow Iran's progress in developing or acquiring weapons of any sort.

“Ultimately this is a Saudi decision and so far the Saudis are holding their cards close to the vest. Whatever, the cut we do not expect a high level of compliance and it is possible if not probable that oil prices move back below $70 per barrel following the meeting. It would take prices near $60 and another meeting to have the weak sisters in OPEC participate in earnest.”

What we take from this is that any scaredy-cat response over the next few days to OPEC sabre-rattling that takes the oil price up is a splendid opportunity to short oil at a higher price. In other words, an announcement effect that is all tail and no dog.

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Barbara Rockefeller
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The Fed is in a no-win situation now.

2008-10-21T08:52:00.000-07:00

Foreign Exchange Outlook ; We continue to see a widening gap between the truly socialist European and the more free-market American approaches. Talk of the US going pinko, whether in the government itself (the Treasury and Fed) or the presidential race, is dumb. We have no evidence that government interference in free markets is going to become institutionalized for the long-run in the US. In any case, the election will be held two weeks from today and we will be able to put aside all this silly talk, and acknowledge that everything being done is being done for the sake of expediency, with nary a core principle in sight.

The key point is that it’s ain’t over yet. Banks may be loosening up for one day or one-week or even 3-month tenors, but that doesn’t mean they will be there for the rollover into a more distant future. By the time this thing is over-sometime next year, we assume-the US will have spent well over $1 trillion, the banking landscape will be littered with the corpses of bad banks, and the people will be thoroughly discouraged, having lost much of their net worth.

This is a good thing-a fresh start-but it’s painful.

By then also the demand for US Dollars will be waning if not gone, and how is the Fed going to sweep them up without discouraging economic activity? The Fed is in a no-win situation now.

But that’s off in the future. For today, we still like the dollar exchange rate, in part because we know the Fed will be cutting interest rates, perhaps to zero (like Japan) and this looks good in contrast to holdouts who refuse to acknowledge disaster. Admitting you have a problem is the first step to curing it, or something. Weirdly, the pounds to dollars gets the occasional burst from the same reasoning.

It’s bizarre, but not wrong.

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Barbara Rockefeller
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Oil traders think it will go well under $50

2008-10-20T08:56:00.000-07:00

The Nov NYMEX Crude Oil futures contract rose to $71.85 at the close on Friday after $69.85 the day before, but events are racing ahead. OPEC will hold its meeting early on Oct 24 and announce a cut of 1-2 million barrels per day, according to OPEC Pres Khelil. This sounds like disarray. Fear of production cuts took the oil price up substantially to $74 overnight and $73.86 at 11:10 am GMT.

ING says that if oil goes to $50 next year, the GDP of the Gulf Cooperation Council (including Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar and Bahrain) would contract 25%. Bloomberg reports that put options on Dec NYMEX futures at $50 “soared 28- fold in the past two weeks,” meaning “Contracts that allow holders to sell 1,000 barrels of oil for $50 each by December closed at $280 on the Nymex on Oct. 17, up from $10 on Oct. 3.” This means some Oil traders think it will go well under $50. Deutsche Bank has a 2009 forecast of $60 on the possibility of a major world recession.

We may think that cheaper oil is a nice antidote to recessionary forces, but it’s also a disincentive to exploration and investment, not to mention investment in alternative energy.

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Barbara Rockefeller
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Bank of New Zealand and Canada to cut interest rates

2008-10-20T08:00:00.000-07:00

Foreign Exchange Outlook : We have yet to get an “October surprise,” the attention-grabbing Event manufactured specifically to influence the election. Perhaps conditions are so bad today that collectively they are the October surprise. Or perhaps in a few days we will get another tape from Osama bin Laden, who sent one four days before the 2004 election.

Even without a terrorist event, we have plenty of potential surprises. Today we get the Conference Board leading indicators, and we know it will be dismal. Bernanke testifies to the House Budget Committee on the US economic recovery. Recovery? We can’t talk about recovery until we have hit bottom, can we? Tomorrow we get the Bank of Canada (and Reserve Bank of New Zealand) rate decision. Canada is seen cutting 50 bp and New Zealand to cut interest rates 100 bp. These are smaller economies but probably in the forefront of more cuts to come until there’s nothing left for savers at all, exactly as occurred in Japan.

We have far too much information in the world today. Nobody can digest it all. It’s tempting to forget about the world of finance and just watch the increasingly lurid soap opera of the US presidential election. But some things stand out-if Iceland really did commit a sovereign default, it doesn’t matter that it’s a tiny country with fewer people than a Manhattan block of apartment buildings. It’s the way of the market to ask "Who’s next?" and then try to get a self-fulfilling prophecy. Hungary? Ukraine? Russia itself? All the fine talk of “recovery” is PR smoke.

There can be no recovery until all the damaged planes have crashed.

We are not there yet.

Still to come are regional US banks that the Feds won't save, among other disasters. All in all, this is awful stuff but good for the US dollar exchange rate.

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Barbara Rockefeller
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Crude oil futures contract fell $4.69, or 6.3%, on a good US crude inventory report,

2008-10-17T07:05:00.000-07:00

The Nov Crude oil futures contract fell $4.69, or 6.3%, on a good US crude inventory report, to close at $69.85, which is the first close under $70 in over a year. OPEC is rattled, and will meet next week instead of November. Market observers now say OPEC will agree to a cut of one million barrel per day to get the price back up-and the market believed the story. The price rose sharply $73.02 before sinking back to $70.98 at 12:12 pm GMT, according to Bloomberg.

So now it’s a duel between producers determined to keep their budgets funded and a market that sees recession cutting demand by a great deal for a very long time. Mastercard said, for example, that demand for gas fell 9% in the latest week. Demand was not as inelastic as we all thought over the past year. The current thinking is that demand increases from booming economies like China will offset drops in the West for a net flat demand outcome.

Well, maybe. The US consumes 24% of the world’s oil. The US Energy Dept report yesterday that fuel demand averaged about 18.6 million barrels a day during the past four weeks, the lowest since June 1999. US oil supplies rose 5.6 million barrels to 308.2 million barrels last week, and crude inventories are set to rise another 2.6 million barrels, according to the Bloomberg survey.

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Barbara Rockefeller
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Government rescue of hedge funds is not going to happen

2008-10-17T06:06:00.000-07:00

Foreign Exchange Outlook :

We keep running into some remarkably foolish commentary now that the world has blown up.

Stratfor claims that it can predict economies without actually knowing any economics, which a little like taking stock tips from the shoeshine boy, isn’t it? It predicted the Russian invasion of Georgia, which had no real effect on global markets and doesn’t pass the “so what? test. Even if you can see the broad outline of upcoming events, that doesn’t mean you know how to trade it. Trading skills are entirely different from macro analytical skills.

Probably the most foolish idea of all is that those nasty hedge funds are going to get their comeuppance, with 30% of them failing (Credit Suisse). According to the WSJ, this is the worst year ever for hedge funds, collectively down 5.4% in September and 10.1% for the year (which is still better than indexing to the S&P, down 20% over the same period). This is because banks are pulling back credit and the funds have to reduce leverage, which means they must sell positions in everything-stocks, bonds, commodities, alphabet soup paper, currencies. That’s on top of having to sell positions to repay investors, most of whom had to sit through a long waiting period to get their money back.

We don’t deny that the contraction everywhere in the financial universe will cause hedge funds to contract, too, but we object to the imposition of a value judgment on the hedge funds as somehow predatory. A good hedge fund offers some protection against the market dropping—the original raison d’etre of hedge funds-which means the investor is prudent and conservative. That’s a good thing, not a bad one. Hedge fund investors include giant massive pension funds, for example, as well as the savings of rich folks. As a value, we’d rather pension funds invest conservatively than be out flailing around speculatively, don’t we? Hedge funds are systematic, too, another good thing. The only thing we can really complain about is leverage, and that’s certainly the pot calling the kettle black. There is not a single financial entity out there not using leverage except maybe Aunt Millie, who doesn’t have a credit card and has paid off the mortgage.

We are not convinced that things have changed forever, government intervention or not, and will be convinced only when all governments everywhere agree to regulate leverage. (Even then the leverage-seeking can find haven in Jersey or somewhere.)

We know that Long-Term Capital had leverage of about 30x and Bear Stearns, 35x. But like the rain falling on the just and the unjust alike, the involuntary contraction of hedge funds due to deleveraging will wreak havoc across the whole industry. It is not necessarily true that the funds left standing will those the least leveraged-a highly leveraged fund can do better than a lightly leveraged one if it was invested in the right stuff. It’s wrong to take joy in the destruction of the hedge funds-that’s somebody’s retirement going down the drain. Unless you want the public to fund all retirements with government plans, we should be figuring out ways to help the hedge funds, too, not cheering their demise.

Government rescue of hedge funds is not going to happen, of course.

In fact, Paulson said there would be no money for “unregulated” companies, presumably referring to hedge funds but also perhaps with a gimlet eye on others—auto companies? Therefore, the fate of hedge funds-whether 30% fail or 80%-depends on when prices stabilize in financial and commodity markets. We should assume that hedge fund managers really do know something the rest of us do not, including timing the economic cycle. TrimTabs, which tracks hedge funds as well as mutual funds, says hedge funds sold $43 billion in September and perhaps as much as $50 billion in Oct. “In many cases, the funds seemed to be raising cash preemptively,” says a TrimTabs executive. Hmm, “preemptively.” Does that mean rejigggering portfolios in the newly deleveraged environment is a worthwhile exercise? Of course. And it also means being less defensive. Gold and cash are both a crummy “investment.” They have no intrinsic yield and the opportunity cost is high. As Warren Buffett says in the NY Times, "Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value." Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: ‘I skate to where the puck is going to be, not to where it has been.’ Buffett is putting his personal money, previously all in Treasuries, into US stocks.

The other big Event to look forward to is the overall calming of panic and frenzy. Alas, panic and frenzy are US dollar -favorable. As the TICS analysis above shows, demand for dollars is an emergency thing. When things go back to normal, this demand will evaporate, and the US will have an unfunded current account deficit. The Middle East and China are sitting this one out, showing not the slightest inclination to rescue anybody. Unless everyone follows Buffett’s advice and the US stock market recovers lustily, we can’t count on foreign capital inflows to balance the deficit. Besides, the dollar exchange rate is not highly correlated to the stock indices. This is the nightmare scenario that so many doom-and-gloom analysts have predicted for so many years.

We take comfort and a strong US dollar exchange rate scenario from the idea that while screaming panic may be gone-overnght LIBOR at 10% for European banks is screaming panic-anxiety is not gone, and rightly so. The bailouts can fail. The bailouts can be insufficient and cause governments to pony up even larger sums. Other companies and industries "too big to fail" can emerge, like the auto companies or insurance companies or perhaps a black swan. The recession can be bigger, deeper and longer-lasting, and hurt other economies worse than the US.

We are sticking with the strong US Dollar scenario a bit longer.

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Barbara Rockefeller
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Oil Prices are down 18% from a year ago and have dropped 51% from the record $147.27 a barrel reached on July 11

2008-10-16T07:23:00.001-07:00

The Nov NYMEX oil futures contract closed lower at $74.53 from $78.63 the day before. It is now firmly under the $80 key level. Today it fell further to $71.21, the lowest since Aug 2007, and is trading on the soft wide at $72.30 at 11:09 am GMT. Bloomberg says Prices are down 18% from a year ago and have dropped 51% from the record $147.27 a barrel reached on July 11.

So, OPEC can hold an emergency meeting in November but it may not have any effect on the price of oil-fear of recession and demand destruction are stronger. Even Hurricane Omar, which caused a Virgin Islands refinery to shut down, is not having the usual effect.

Gold Futures are soft, having fallen to $835.50 from $836.30 the day before. Some analysts say gold is not thriving because some futures traders are getting hit with margin calls or otherwise need to raise cash.

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Oil Prices are down 18% from a year ago and have dropped 51% from the record $147.27 a barrel reached on July 11

2008-10-16T07:15:00.000-07:00

The Nov NYMEX oil futures contract closed lower at $74.53 from $78.63 the day before. It is now firmly under the $80 key level. Today it fell further to $71.21, the lowest since Aug 2007, and is trading on the soft wide at $72.30 at 11:09 am GMT. Bloomberg says “Prices are down 18% from a year ago and have dropped 51% from the record $147.27 a barrel reached on July 11.”

So, OPEC can hold an emergency meeting in November but it may not have any effect on the price of oil-fear of recession and “demand destruction” are stronger. Even Hurricane Omar, which caused a Virgin Islands refinery to shut down, is not having the usual effect.

Gold Futures are soft, having fallen to $835.50 from $836.30 the day before. Some analysts say gold is not thriving because some futures traders are getting hit with margin calls or otherwise need to raise cash.

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Barbara Rockefeller
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Does this mean the Fed has room for another interest rate cut, or series of cuts? Yes.

2008-10-16T06:16:00.000-07:00

Foreign Exchange Outlook: Everybody wants to know how deep the recession will go. Yesterday’s retail sales for Sept were worse than forecast, a drop of 1.2% (including a drop of 4% for autos), while every one of the 12 regional Feds reported a slowdown in consumer spending. The Empire State manufacturing index slumped to a shocking -24.6 from 7.5 in Oct. And inflation hasn’t really started falling much-the headline PPI fell 0.4% but ex-energy, rose 0.4%. PPI is up 8.7% y/y, and core PPI is up 4%. Some of this is the pig in the python and will eventually get digested, but the misery index is about to go up quite a bit, and moreover, everyone knows it.

Today we get CPI at 8:30 am ET, probably a rise of 0.2% (but with forecasters showing a wide range from –0.3% to +0.2%, according to Bloomberg). Core CPI is probably up 5% y/y, better than Aug at 5.4% y/y. Core CPI is probably 2.5% y/y, the same as August.

Does this mean the Fed has room for another rate cut, or series of cuts?

Yes.

It will be interesting to see how the Fed weaves together monetary policy, now in lights-flashing emergency mode, with a new willingness to consider bursting bubbles before they blow up too far. This seems to be the new Bernanke stance, after two decades of the Greenspanian hands-off attitude toward bubbles. Speaking to the Economic Club of New York yesterday, Bernanke said we need to take a fresh look at how regulation and monetary policy might take on the “dangerous phenomenon” of asset bubbles—after the current crisis is past. It’s fun to note that when Greenspan held his first Fed board meeting, according to Woodward’s Maestro and other books about the Greenspan Fed, he asked why the Fed was doing nothing about the stock market at the time. This was just ahead of Black Monday. In other words, Greenspan was not always a hands-off guy on Randian principles.

Also today we get industrial production for Sept, probably a drop of 0.8% in the Sept month for the second month of decline.

The other important piece of data today is the August Treasury capital flow report, TICS. Bloomberg reports that forecasters expect foreign investors to have raised their stakes in US assets in August to $30 billion from $6.1 billion in July. We await the authoritative report from Bank of New York capital flow expert Woolfolk, who separates out the true long-term flows from the shorter-term hot money.

The sentiment in the oil industry is that the recession will be deep and long-lasting, hence the dramatically falling prices. With the US already having done a consumer stimulus in the spring, many interest rate cuts, and a bank bailout, is it running out of bullets? We say the oil gang lacks faith in the ingenuity of politicians newly motivated to keep their jobs. We tend to throw the bums out when they fail us so drastically. What else can the US do to goose growth and avert recession another day? Plenty. Congress could do an emergency tax cut for business, or another stimulus for consumers, plus the usual rate cuts. Poor Bernanke-he really is going to be stuck with the Helicopter Ben image.

Does this stuff work?

Yes, as we saw with the $300/$600 tax rebates.

Does it suffice to keep the economy rolling along for one or two more months? Yes. As Keynes said, the long-run is only a series of short runs. It’s a little like catching a cold-suppress the symptoms, and while you still have a cold, it does pass after ten days. The goal of the Fed and government is to prevent us feeling the symptoms-scratchy throat, runny nose, and coughs. Your head can rationally say conditions are terrible but an extra $300 in your pocket makes you willing to overlook what the brain is telling you. We don’t know nearly enough about behavioral economics, but we bet that some initiatives (like job creation in the alternative energy sector) will have a salutary effect even among people who could never get one of those jobs, because it gives the sense that “somebody is doing something.”

This brings us back to the election, now less than three weeks away.

McCain wants to give a tax break to rich people, which does trickle down but not to the extent he claims.

Obama wants to give a tax break to the working class, subsidize alternative energy, and spend big sums on infrastructure, among other things, which puts cash in more pockets right away.

It’s a no-brainer which is better for the economy and the prospect of the US coming out of recession. Foreign Exchange traders are opportunistic-even if they buy the old Reagan ideology, they can see which side of the bread has the butter. This is the sense in which Obama is dollar exchange rate favorable and McCain is not, quite apart from the cost of the war in Iraq. People don’t want ideology today-they want cold, hard cash.

Considering the state of the auto industry and the difficulty of getting a car loan today, we would not be surprised to see some new government program to subsidize the average Joe buying a new car. Maybe there can be a Freddie/Fanny for car paper guaranteed by the government? Quick, stop them before they invent another new program.

On the whole, the US dollar exchange rate looks good for a day or two, before the next Event.

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Barbara Rockefeller
Forex Trading Reports

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