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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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
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