Pounds to US Dollar rate rallies as things are worse elsewhere

Foreign Exchange - Global Currency Outlook

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

But it’s just wishful thinking.

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

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

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

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

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

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

Bye For Now

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

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

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

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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Australia and New Zealand Dollar, the prospect of rate cuts is currency-negative this time.

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

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

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
Forex Trading Reports

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