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

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

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
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investing in emerging markets or trading emerging market currencies

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
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Contact IMS Foreign Exchange + 44 207 183 2790

Consider US investors with positions in European stocks or funds that hold banks.

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

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we have faith in the world’s ability to produce more bad news.

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

Foreign Exchange Trading

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

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
Foreign Exchange Trading
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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
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