Reserve Bank of Australia and Bank of England to Cut Interest Rates

Foreign Exchange Outlook TreasSec Paulson’s once-bright image is now more than a little tarnished after his plan gave the appearance of an arrogant power-grab, leaving Fed Chairman Bernanke as the sole standing hero. Bernanke speaks about the economy tomorrow and everyone is waiting breathlessly until we hear what he has to say about further federal government bailouts of everybody from General Motors (Detroit already got a little-noticed $25 billion in last week’s bailout) to the states (California Governor Schwarzenegger already applied on Friday). As noted by many observers, it’s a little silly that a state--with taxing authority--can’t peddle its bonds, or that companies with raw materials and inventory can’t get a loan at a sensible rate.
The total lack of trust is what is gumming up the works, and nowhere is the lack of trust worse than in our inability to price credit default swaps. As perpetual bear James Grant said on “60 Minutes” last night, we don’t even know the face value of the market, probably somewhere between $50-65 trillion. Credit default swaps were invented as insurance against default, but not named “insurance” because then the contracts would have to be regulated by the insurance regulators, not to mention being put on balance sheets. This is the market Warren Buffett said was pure poison a few years ago. It is also the market that put AIG on the block to the Feds. Solve the credit default swap problem, and a lot of other problems go away. We have no idea how this could be achieved and at a guess, neither does the Fed-yet.

The Reserve Bank of Australia meets tomorrow and the Bank of Enlgand meets on Thursday, with both banks forecast to cut interest rates by 50 bp. The Fed meets Oct 28-29 and the ECB next meets Nov 6, but chatter is going around that the central banks could coordinate rate cuts or at least all cut by the same amount. As noted above, monetary policy has exhausted its capability to goose markets, but never mind—rate cuts are good for confidence because it shows the governments are not dithering. In fact, Market News reports that the Swiss newspaper Sonntag reported yesterday (without naming sources but claiming they are “independent and credible”) that the Swiss National Bank will cut rates 25 bp by December at the latest, and the action could come as a coordinated move with the BoE and ECB.

Other policy options, in the US at least, include promises to bail out just about anybody who asks, something the cartoonists have already latched onto. The problem is not whether this is “socialism” or against US principles-of course it’s against US principles-but how to fund it. The only people with national savings (reserves) are in the Middle East and Asia. These countries lack developed capital markets (not to mention the rule of law, getting a bit battered these days), and so we imagine that Paulson and others have already been burning up the phone lines to these countries asking for a form of petro-dollar recycling.

This was a big deal in the late 1970’s and early 1980’s as it became clear that countries with newfound wealth had no real place to stash the cash. This time we have Emirates building islands in the sea shaped like palm trees and skyscrapers going up in Shanghai, so opportunities to invest domestically are not as scarce as thirty years ago-but still not big enough or safe enough for all the savings.

Why should these people rescue us now? After all, we brought in on ourselves with over-spending and stupid math-based con games.

Well, it may be touch-and-go, but in the end, the mercantilist argument will probably win. These countries, from Saudi Arabia to China, are export-based economies. No exports, no economy. No exports, no revenue to buy off restive populations who have a newfound hankering for everything from indoor plumbing to a Mercedes Benz in every driveway. They will rescue us because it is their political self-interest to do so. But these people are very, very smart and can see that the price can be forced to a very high level. Buffett has shown the way and established a new benchmark for big deals-10% dividend plus equity options. By the time this is over, over half the US economy can belong to the Middle East and
Far East. No wonder Western companies are wooing suitors in Japan so assiduously these days.
And the US is out ahead of the pack with initiatives to fix the situation.

Citibank got a court to open up on a Sunday to press its case for Wachovia over a competing bid from Wells Fargo. This is crass, but imagine a court opening on a Sunday in (say) France. In Europe, Trichet said it all-“We are not a political federation. We do not have a federal budget.”

So if a Middle East sheikh or Chinese agency wants to invest in “Europe,“ where do they send the check? This is an echo of Kissinger asking what telephone number to dial when he wants to negotiate with Europe. Well, perhaps this crisis today will nudge Europe toward greater federation, but we wouldn’t count on it.

Finally, where is G7 or G8? It was supposed to meet at the end of this week. The only validity the group can have going forward lies in expanding G8, which already includes Russia, to include China, and perhaps Brazil. We assume the British would never agree to inviting India, and the US may baulk at Brazil. Maybe we need a new kind of organization altogether, once that negotiates directly with OPEC, say. The Group has become increasingly toothless and irrelevant. If it is to survive, it must act this week. For that to be effective, Europe has to act as a single entity on the financial crisis, too. Until the rest of the world gets its act together, the US Dollar exchange rate will continue to be favored, even though it can hardly be said the US is doing a good job. In fact, it’s doing a terrible job, but it’s showing it can do something, even if it’s wrong. Action is better than paralysis, politically. We like the US dollar this week, and we also like the yen, especially in the old carry-trade crosses. The commodity currencies will be the hardest hit, since global recession hits commodities first. And we still await word from china about what it wants from all this.

There is no solution without China.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

Best Euros Rates - Best Dollar Rates visit IMS Foreign Exchange

The Paulson plan - violates the principles of American capitalism

Foreign Exchange Currency Rates : It doesn’t matter whether we approve of the $700 billion plan—Congress is not consulting us—but it does matter whether the market likes it. We say Kentucky Senator Bunning is right--it violates the principles of American capitalism. Forget whether it’s “socialistic”—that’s just a word with little real meaning in the US. But it means we do not really believe our system is valid. A loss of confidence in the system by the very people hired to oversee the system, the Treasury secretary and the head of the Fed—is extremely bad for the image of the US.

How can anyone trust a US security from now on except US government paper, and with the rising deficit, perhaps not even that?

The Paulson plan would raise the ratio of government debt to GDP to 70%, the highest since 1954, according to Bloomberg. Something named TD Securities Ltd. In Sydney says this number could drive the dollar to $1.95 against the euro. The firm claims to be able to show a correlation of the deficit ratio to the dollar.

We continue to believe that the Fannie/Freddie bailout and then the AIG takeover were motivated in large part by concerns over getting capital inflows from Asian and Middle East investors, including central bank reserve managers. Overnight there was a run on a bank in Hong Kong rumored (falsely) to have giant losses from Lehman, and Market News Singapore reports that investors feel swindled by Lehman-based derivative offerings. Well, too bad.

They were aiming for high yield, right?

We hear from Bernanke this morning starting at 10 am. Today will be interesting—let’s watch to see how and to what extent opposition rises to the Paulson plan, not least the urgency part. Congress is showing a commendable reluctance to be stampeded. We are suffering from the Chinese curse of living in interesting times. And speaking of the Chinese, what lesson are they taking from all this? That Paulson was speaking with forked tongue when he urged them to deregulate their own markets.

We say the US dollar cannot be favored in this environment. It seems not to be under much pressure at the moment, but just wait—unless we get more Buffett-style votes of confidence in the US system, the US system weak and being kicked while it’s down, and by the very people charged with supporting and defending it.

We would not go as far as to predict 1.95, but the days of 1.40 and the glimmer of hope for 1.35 are fading fast, even if crude oil were to fall again. At a guess, the dollar will reach the July high of 1.6038 within a week or two, depending on the outcome of the Paulson plan. Note that this $700 billion crisis is overwhelming the oil factor. If oil keeps rising, it’s another leg kicked out from under the dollar. Europe and G7 are clamoring to be heard and to have a voice in the outcome in the US.

This is going to be interesting—foreigners often have a sounder grasp of US principles and ideals than the citizens themselves.

Bye for Now

Barbara Rockefeller

Best exchange rates when buying euros or buying USD dollars

Jim Cramer’s forecast of the house price bottom in June 2009.

Foreign Exchange Currency Outlook :

The consensus is coming down on the side of the Fed not cutting rates today. The FT says “An emergency cut would risk dividing the committee, some of whose members regret backing big cuts at the time of the Bear Stearns crisis in March. However, Fed hawks might rally behind a position that held out the prospect of a cut later if needed, sending a signal of unity at a moment of crisis.” In contrast, Bloomberg reports that Fed funds futures are now pricing in a 90% probability of a cut.

Who to believe?

We say the Fed is in a win-win situation. It would get good marks for holding fast in the face of Wall Street, which will look like a form of resisting moral hazard since Wall Street is always crying for rate cuts under all circumstances, and it equally would get good marks for a cut on the grounds that the Fed has the ability to be nimble and flexible in the face of a crisis.

Until we get the decision and statement at 2:15 pm today, other data will get less than full attention. Of the data on the schedule today, we favor the Treasury capital flow report at 9 am. The release tends not to have a market-moving effect, but it’s the only data-based indicator of overall confidence in the US economy and financial system. We like to see the capital inflow roughly match the outflow from the trade deficit.

The other big factor remains the assumption that the US and global economies are sinking into recession due to credit contraction arising out of the current crisis, and as a result, commodity prices will continue to drop, especially crude oil. We are more willing than before to concede that recessionary tendencies logically should start to appear, even if technically the two quarters of negative growth do not. But doesn’t the falling crude oil price give a boost to growth that offsets other negatives?

Also taking this stance is IMF Deputy Director Lipsky, who says “there is still no obvious reason to expect the global economy to go into recession,” according to Market News. “Lipsky told Financial Times Deutschland that housing prices might now be experiencing undershooting and that risk aversion may have become too pronounced. Industrialized economies will be in a very ‘sluggish or nearly stagnant phase’ in the second half of this year, but a ‘gradual recovery’ will proceed in 2009, he said. ‘This, however, will not be able to dispel quickly the financial tensions,’ he added. Lipsky suggested that asset prices had dropped more than fundamentals warranted: ‘After years of overshooting of asset prices and of too-low risk perception, we may now be seeing a kind of overshooting of the prices and a too-strong risk aversion.’ “Still, he said, ‘We are operating on the assumption that next year we will see an end of the decline of asset prices.’ In particular, the US housing market ‘will bottom out in the course of the first half of 2009,’ he predicted. ‘The considerable decline of US housing prices is slowly resulting in the indices for the affordability of housing returning to levels that are reasonably normal.’"

Note that this match Jim Cramer’s forecast of the house price bottom in June 2009.

Conditions are very bad.

McCain got criticized sharply yesterday saying “the fundamentals” are sound, seemingly downplaying the crisis or perhaps not understanding it, and then pretending he was talking about the worker and productivity. This was a dumb ploy and confuses the issues. Are “the fundamentals” sound? Well if we define “the fundamentals” as factories still producing and people still going to work, even with terrible income inequality, yes. We say these are not the conditions of the Great Depression. The banking system is not losing 30% of capacity in a short time even if 30% will be the eventual number after the contraction is over.

Foreclosures are nowhere near 1930’s levels. We do not have deflation and we do have a wiser government and Fed. To say today is better than (say) 1933-34 may not be saying much, but honestly, can we get along without Lehman? Yes. Therefore, we are not so sure that money flooding into the dollar and Treasuries will exit just as fast. Tentatively we say the dollar trend will resume, helped mightily by crude oil. This suggests the japanese yen futures trend will last, too, and that’s harder to swallow.

But keep the fiath—the trend is your friend and the chart the best tool.

Bye for Now

Barbara Rockefeller

Need to Buy US Dollars - Best Exchange Rates visit IMS Foreign Exchange

commodity prices crashing down around our ears

Foreign Currency Exchange Outlook : For the price of oil to continue south despite lower US stocks and despite a hurricane headed for the Gulf Coast implies extreme bearishness about the global economy. For gold to have fallen to the lowest price in a year implies a spreading fear of deflation. Declines in both oil and gold suggest that investors and speculators are getting more interested in recession-proof assets. For the financial sector to be leading global stocks downward means investors are starting to batten down the hatches.

All of this suggests that bonds should be the flavor of the day and we can’t expect yields to recover as long as fear is ruling. Since the US is the safe-haven bond of choice these days, the dollar can only gain as these trends gather momentum, which is nice for the dollar but an unhappy development for the Fed. The Fed would prefer to see rising yields since that helps the banking sector, which can get deposits cheaply and in the worst case scenario (a drop in lending), just buy Treasuries for a nice spread. Now that banks are de-leveraging and foregoing fees on iffy “products,” recovery in the financial sector should be painfully slow.
Longer run, of course, the US dollars “should” have a higher relative real yield, but for the moment, foreign exchange traders and investors are willing to overlook that. Look at pound to Japanese yen if you don’t believe it. Risk aversion has a powerful grip and can overcome even the juiciest of carry-trade spreads, at least sometimes.

That brings us to the question of whether the Fed would consider a rate cut on the grounds that a rising dollar is the same thing as tightening credit conditions. This is muddied by banks being unwilling to lend for reasons other than credit quality. Also arguing against a rate cut is the high inflation rate in the US, technically over 5%, although the Fed might argue that with oil and other commodity prices crashing down around our ears, we have to forecast falling inflation. (Note that we get fresh inflation data next Tuesday, although they are lagging and will not reflect the recent drop in commodity prices.)

Some observers imagined that Yellen, in remarks last week, suggested that ever-rising interest rates are not a foregone conclusion. We didn’t see it that way, but her comment was ambiguous. Nobody expects the Fed to take any action at next week’s policy meeting, but it’s conceivable, just, that we could get a more balanced outlook in the press release. If the Fed were to say the outlook for inflation has improved by a lot, it could put a serious dent in dollar’s uptrend. That would imply the Fed willing to ease while the ECB is still in full-dress hawk mode. It’s probably a remote possibility and yet we can detect the faintest whiff of such risk.

The most interesting aspect of it is where it leaves the UK, which seems to be siding (so far) with the ECB on fighting inflation and to hell with the fading domestic economy. The Bank of England seems to think it is stuck with falling activity and rising inflation and unemployment, but because it can see light at the end of the tunnel (in 2010), no rate action is appropriate.

Well, they are entitled to their opinion.

At this point, the deflation scenario has not yet captured everyone’s imagination. The market is in the grip of the chartists, and chartists have as their first principle the observation from Charles Dow that once a trend is in place, we expect to remain in place until something Big comes along to disturb it. Any suggestion the Fed might cut rates could be Big, but then again, maybe it’s not, since it doesn’t necessarily flatten the yield curve. Besides, lower rates promote whatever lending is left to get done, cheer up the stock market, and would show the world that the US is still on a growth path and not headed into technical recession. Most of all, it would show that the US is pro-active, unlike others. It’s a bit bizarre to say so, but a rate cut or rate-cut talk from the Fed next week would probably be dollar-favorable! And even if the Fed refrains from saying anything remotely lucid about rate levels potentially going down, we are pretty sure it will be increasing liquidity to financial institutions at quarter-end and year-end, which is almost the same thing, if without the announcement effect.

Today is the anniversary of the 9/11 attacks on the World Trader Center and Pentagon. Is there increased wariness and nervousness? Yes, probably, but it’s unwarranted. It’s those of us in the Western mode who think in terms of higher risk on an anniversary.

We have no evidence that the bad guys think that way, too.

Bye for Now

Barbara Rockefeller

Best Exchange Rates when you Buy US or Canadian Dollars

US dollar’s fate is linked directly to moves in commodities.

Foreign Currency Exchange Outlook : We don’t get a lot of releases today, thank goodness, mostly mortgage applications and the Energy Dept’s oil stocks in mid-morning. Last week the oil stocks report was a catalyst but unless there is a surprise today, the report should be neutral. With the Baku pipeline supply in the offing, prices could fall again.

It’s a sad thing to say, but the US dollar’s fate is linked directly to moves in commodities. With both oil and gold up yesterday, the US dollar was undermined and we are a little surprised at its overnight recovery, which seemingly comes on renewed optimism that the US economy will weather the current financial market storms, including Fannie/Freddie and Lehman. This is a nice touch of confidence that would build if we could get some bad news from Europe. That’s a rotten thing to say and of course nobody wants to hear that Europe is experiencing troubles, but it’s true all the same. It’s the relative performance of the two economic blocs that counts, so if the focus is on US problems, European problems have to be worse for the dollar to prevail.

Another way of looking at things is to note that the Foreign Exchange market is now embracing the US dollar rally and is fighting back against the knee-jerk circular logic of rising commodities (especially oil and gold), falling dollar and then falling dollar, rising commodities. This is a vicious circle of its own. To break it on “confidence in the US economy” alone is a scary thought. Can it be done? Well, yes, if the price rises in oil and gold are not too big or long-lasting, and the move is seen as only a consolidation, not a reversal. Plus, it would help to hear more comments like Fisher’s, that the Fed really wants to raise rates off their abnormally low levels to fight inflation and we can’t count on the slowdown to do the job.

As always when prices move into consolidative mode, we are now in search of new factors to move us out of the emerging range. We want something to move the euro lower than 1.4627, yesterday’s low, lest we get a move over 1.4806, the overnight high. We don’t see it on the horizon, though—and don’t forget that sheer uncertainty can be bad for the dollar. All we would need is a rumor, and don’t think for a minute that traders are above starting rumors just to stir things up. Low volatility in a narrow range is a bad thing—it makes prices vulnerable to an oversized response to a shocking story (that might not even be true).

On the whole, though, we are inclined to think the US Dollar rally is here to stay and will resume today after the most disappointing of minor corrective moves. At some point we have to expect a bigger correction that we can opportunistically latch onto, but in the meanwhile, it pays to stay on the bandwagon.

Bye For Now

Barbara Rockefeller

Need to Buy Euros - Best Exchange Rates contact IMS Foreign Exchange