Foreign Currency Exchange Outlook

Foreign Currency Exchange Outlook : The calendar is rich today, with Q2 “advance” GDP probably the one with the potential to move the Foreign Exchange market. The consensus is a real 2.3% y/y, based in part on $78 billion in stimulus checks, so a bad number (under1.5%) would be dollar-negative. Bloomberg reports that the survey range is a wide 0.9% to 4.2%. Obviously, 4.2% would be dollar-favorable. Market News has a forecast range of 1.7% to 3% and a median of 2.1%, and notes that “The lowest GDP estimate is still far higher than the 1% final seen in Q1 2008 and +0.6% seen in Q4 2007.”

More interesting is the question of how you can have a recession without getting the conditions that define a recession—two quarters of negative GDP.

There is a sense that you can have a recession without meeting the definition if everyone agrees it feels like a recession.

We do not agree. Definitions count. If GDP is not doing the job, get another definition. How about falling employment or rising unemployment? We think employment is probably lagging and not leading, but let’s say for the sake of argument that it’s a good indicator. Today we get first-time unemployment claims— with the forecast for a 9000 drop instead of the usual rise. So that one doesn’t work, either, at least not this week and not if you have a bias to find recession somewhere, anywhere.

Golly, maybe we don’t have a recession.

Economists, according to a Bloomberg survey, put the odds of a recession down at about 50% from 70% in April. The NBER is the arbiter and sticks to the idea that recession is a “significant” drop in activity over a sustained period of time, usually taken to mean 2 quarters. Decline should be visible in GDP, payrolls, production, sales and incomes. Well, we’re not getting it except in employment, where job losses are about 500,000 so far this year, according to Bloomberg. A lot of time is being wasted looking back at the 2001 recession, which was over before the NBER had decided on using the word. Merrill Lynch’s Rosenberg, however, points out that Q1 2001 GDP was originally reported up 1.2% and only later revised down to a 0.5% drop.

The world is gradually changing cyclically. Emerging markets like China and India are in more trouble than they are admitting and can be expected to slow down. Western economies are stable and not as weak as some headlines would try to scare us into believing.

A commodity bubble bust would be healthy for everyone and help restore some balance, but the status quo before the oil crisis was not exactly stable and balanced. With various factors in a topsy-turvy condition, including the Fed lending buckets of money practically to all comers on questionable collateral, we are having a hard time believing in the US dollar rally. Oil simply must resume its downmove for the dollar to hang on to gains, let alone make new ones.
Weirdly, we have two medium-term technical analysis systems.

One has a strong sell signal and the other has a strong buy signal.

This is maddening. Watch out.

If you are risk averse, this is a good day to get square and stay that way until Sunday night.

Buy for Now

Barbara Rockefeller

oil is down some more

The Sept NYMEX crude oil contract settled down $2.54 at $122.19, the lowest since
May 6 and is down $25 from the July 11 record high. This morning, oil is down some more to $121.71 at 11:06 am GMT ahead of the US inventory report. We know demand for gasoline is down for the 14th week (per Mastercard) and Bloomberg reports gasoline supplies are expected up 400,000 barrels for the 5th week of rise.

One analyst says the next layer of support is at $117.

Bloomberg reports that US drivers drove less for a seventh consecutive month in May. According to a government report on 7/28, vehicle-miles fell 3.7% y/y in May, the longest streak since 1979. Also, the Energy Dept said demand for oil and petroleum products dropped 4.3% y/y in May to 19.7 million barrels a day, or 889,000 barrels a day less for the first five months of the year over the same period a year ago. This is named demand destruction.

Exxon and Chevron will report the lowest production since 2005, with Q2 output down over 5%, so that earnings depend on price rises. According to analyst reports summarized by Bloomberg, together they will spend about $48 billion on capital outlays this year, which sounds nice until you discover that they are spending even more to buy back their own stock, a disclosure we first read in Portfolio magazine. Together they are spending about 100 million US Dollars a day on capital spending for exploration and produc-tion—but “If it maintains its first-quarter pace of buybacks, Exxon Mobil will repurchase 38 billion US Dollars of stock this year, or almost $104 million a day.”

There’s something wrong with this picture.

Italy forced out of the Euro

Market News reports that the UK newspaper The Telegraph says Italy is sliding into a deep structural crisis and risks being forced out of Europe's monetary union as the region's economic downturn gathers pace, citing a new report by Capital Economics.

We say the idea of a country leaving the EMU, whether Italy, Spain or Ireland, is dumb and it ain’t going to happen, but that doesn’t mean a mile of newsprint won’t get wasted on it.

For Best Euro Exchange Rates visit IMS Foreign Exchange

We like the US Dollar rally

Foreign Exchange Currency Outlook : At 8:15 am today, ADP Macro releases its estimate of private sector payrolls (to be released Friday morning). We hate to admit it, but it’s an important number. It’s disheartening that economists, even economists with a very big amount of inside information like ADP, do such a bad job of forecasting this piece of data.

One of the issues with the ADP Macro information today, GDP tomorrow and payrolls on Friday is that each one of them has the power to reverse the psychology of the currency market in a nanosecond. One day we are all wailing and moaning about less than half of subprime losses disclosed and the IMF saying the financial crisis is not over by a long shot, and the next day we are all rallying the US Dollar like mad on rising stocks and falling oil. We need to mention that a steady diet of bad news out of Europe is helpful to the dollar rally, since foreign exchange traders perceive the US is closer to the end of the “recession” than Europe, while Japan is just starting.

This flip-flopping and zigzagging is unhealthy. Normally it takes a much longer time, a few days at least, for sentiment to reverse. We like the US Dollar rally but feel that it’s fragile and vulnerable to a crash if some piece of really bad news comes out of left field. As Mr. Malkiel liked to say, we can’t forecast the news. This is not strictly accurate. We can forecast the news, at least the regularly scheduled news, at least some of the time and within a forecast range. This is the sense in which price changes based on news are not random.

But he’s right that what we can’t forecast is Shocks.

The list of potential Shocks is staggering.

First among them would be a new oil supply problem, and especially if it’s associated with a big “geo-political” situation like Iran. If Israel were to start something (or respond robustly to something), oil would zoom back up to $150 and beyond, probably $200. This is why oil price forecasts are so iffy, not to mention that nobody knows how to measure the true breaking point of the speculators (at which they run for the exit).

Another shock could be a terrorist event, or a regional bank failure of some size in the US or Europe, or a political assassination, or a big country officially announcing reserve diversification out of the dollar, and so on.

We need to be especially vigilant these days.

The dollar rally is tiptoeing on thin ice.

There be monsters below.

Bye for Now

Barbara Rockefeller

we remain puzzled by the Pound

Foreign Currency Exchange Outlook : We get a number of releases today but the focus will be on only one, the Case-Shiller home price index for May, probably a drop by 16% y/y. It was 15.3% in May, hence an acceleration. The Bloomberg survey of 25 economists yields a forecast range of -14.8% to -17%. The index has fallen continuously since Jan 2007. The Bloomberg story notes that the National Association of Realtors said last week that the median price of existing home sales fell 6.1% y/y in June (after 8.5% in April). The discrepancy is explained by different survey coverage and methods.

Oh, really?

The Conference Board consumer confidence index, an hour later at 10 am, will probably drop to 50.1 from 50.4 inJune, says Bloomberg, the lowest since February 1992.

Yesterday the IMF report said the bottom is not yet in sight for US housing. The direct implication is that the bottom is not in sight for defaults and foreclosures, either, even in prime assets, and with credit quality declining in credit card and other bundled securities, banks must continue to shrink their balance sheets. We could even get a nasty shock in the form of additional regional banks failures, although over the weekend at least one bank failed (in Nevada) and it didn’t make the national headlines.

We had a relatively bad day in the financial markets yesterday (oil up, stocks down) but the US Dollar was not sold off. This suggests the market is willing to accept bad news as normal in the US while still feeling shocked by equivalent bad news in the UK and Europe. The US Dollar Japanese Yen exchange rate bottomed last night at 107.26 and has risen steadily to 107.88 so far—will it ever break 108? Judging from bad data in Japan today, the probability is getting higher.

However, we remain puzzled by the Pound. Yes, it fell this morning on the bad mortgage and retail sales news (from 1.9945 near the US close yesterday to 1.9860 this morning) but this is not a big move and it may already be over, having found support at a hand-drawn support line at 1.9860 and starting to rise off it at 8:15 am ET.

The point is probably that the focus is not entirely on the US dollar anymore. Foreign Exchange Traders are willing to consider bad conditions elsewhere. Pressure from the financial sector and economic data keeps the US Dollar Exchange Rates on the defensive, but the absence of favorable data from other countries, including the eurozone, makes the pressure not too hot.

We await a breakout on something, probably GDP in Thursday or payrolls on Friday.

It could be a boring sideways grind until then.

Bye For Now

Barbara Rockefeller

Buy Euro Dollars

Foreign Exchange Currency Outlook : The Senate passed the bill on Saturday that bails out Freddie and Fannie and offers initiatives to fix some small part of the mortgage crisis. The White House press office says it is likely that Bush will sign the bill (probably Wednesday). We already know the general dimensions of the bill so it won’t be news, but it’s still one stop closer to making the “implicit” government guarantee an explicit one, and the bond gang likes it. Names like Pimco’s Gross are happy to say they will buy the GSE paper, especially since it yields some 78 bp over equivalent paper from the government. We fail to understand the bond market, as usual. Why would the yield not fall to the same as the government paper now that the guarantee is more explicit? Market News reported Friday that agency debt spreads will tighten this week once the legislation is wrapped up, so perhaps patience is called for.

Probably the important thing to take away from the new legislation is not its content, but rather that action in the US has been blazingly fast compared to previous crises and certainly compared to comparable action in other countries (think of how long it took Japan to deal with its banking crisis). Within a year of the crisis emerging, we have dealt with a failing investment bank (Bear Stearns), a stimulus package, a GSE bailout, a limit on short-selling, and a handful of other initiatives. This is one time when the relative flexibility of adaptability of the US is on display. We may not approve of every aspect of it, but we must admit it has been speedy in the grand scheme of things. We may also not get a recovery bounce out of it, but a recovery bounce is at least a possibility.

We get a lot of data this week, including tomorrow’s Case/Shiller home price index for May. Well, we know it will be bad. So far, house prices have fallen some 16% and the ultimate ending point will probably be a drop of 25-30%, so we could be more than halfway there. Also tomorrow is the Conference

Board consumer sentiment, following the University of Michigan on Friday.

Wednesday is the ADP Macro estimate of private sector payrolls ahead of Friday’s release, which is the real biggie of the week. We have to talk about it all week, alas. So far the survey numbers are coming in around –50,000-75,000.

Thursday gives “advance” GDP for the second quarter. Because of stimulus checks and other one-time things, it could be very high, even 2.6%, according to Lynne at www.wallstreetinadvance.com. Even a reading of 2% is still decidedly not “recession” and let’s remember that Europe has been busily revising growth numbers for the year sharply downward. Bloomberg pours cold water on a single good quarter, saying its survey of 60+ economists yields a forecast of 1.5% for the calendar year, from 2.2% in 2007 (with inflation at 4.1%).

Lynne points out that other news on Friday may be good, too. June construction spending could get lifted by the change in New York regs that inspired pent-up starts. Also, the ISM manufacturing index “could see a bump on settlement of the American Axle strike, which rippled through many industries.”

We can easily build a US dollar rally on good data all week, which will include corporate earnings by the bucketload, as long as there are no unpleasant surprises and especially if oil continues downward or at least tame. Some bad news elsewhere would help the dollar, too, now that traders are willing to give some weight to bad data from anywhere other than the US instead of brushing it off. Keep in mind the condition—that oil continues downward or at least tame. Oil is everything. We could have splendid data, talk of recovery, bad data elsewhere, and a favorable shocks but it will go mean nothing if oil breaks to the upside again.

Still, having given all those warnings, it looks like the US Dollar is growing legs. We see it in the form of a new signal to buy US Dollar against the Swiss franc, even if it’s not confirmed by similar signals in the Buy Euro Dollars.

Obama speech yesterday in Berlin was wonderful.

Political Tidbit: The Obama speech yesterday in Berlin was wonderful. First, the man can speak, unlike the guy we’ve got now.

He voiced American idealism, something we haven’t heard for a while

instead of getting the second-rate but still nasty Kissinger-esque Realpolitick of the current administration. Second, the crowd was applauding everything Obama said and waving American flags (instead of “Yankee, Go Home” banners). When was the last time we saw that? They threw tomatoes at Nixon in Venezuela and today’s banners for Bush are unprintable in a family newsletter.

Third, some 200,000 people attended, a very large crowd to listen to a foreign politician in any city. Fourth, the speech incorporated references to the American involvement with Berlin, from the 1948-49 Berlin airlift, to Kennedy’s “Ich bin ein Berliner” in the early 1960’s, to Reagan’s “Mr. Gorbechev, tear down this wall!,” to the Berliners actually tearing the thing down in 1989, as the rest of world watched on television with tears streaming down their faces. If you are going abroad to make a speech during a US presidential election, you can’t beat Berlin for a venue.