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
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risk aversion is rising and rising risk aversion is dollar exchange rate favorable

Foreign Exchange Outlook : The USM service sector report is due today, probably a drop to 42 or the lowest since the index was invented in 1997. We also get the ADP Macro forecast of private sector jobs ahead of Friday’s critical payrolls report. This is oddly not much on the radar screen yet, even though on Monday the DJ Newswire reported a median estimate of 200,000 jobs lost. Potentially disturbing is a story in the WSJ asserting that Paulson is thinking about asking for the other half of the 700 billion in TARP money authorized by Congress. Originally his idea was to leave half of it for the incoming Obama administration. He would act next week if he acts at all (he leaves for China today or tomorrow, a wasted trip if ever there was one). This raises the question of what Paulson knows that the rest of us do not.

We hate to say it, but if stocks are down today, that implies risk aversion is rising and rising risk aversion is dollar exchange rate favorable. Bah. This is no way to run a currency market. With average daily ranges shrinking and little directional guidance, we have to expect a breakout at some point - but probably not today. We may have to wait for Friday’s payrolls for that, unless tomorrow’s rate cuts do the job.

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Barbara Rockefeller
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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
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We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

Foreign Exchange Outlook: At last the Treasury and Fed have launched an initiative that the market likes and is responding to. At last the government is doing something about housing directly and not indirectly through credit default swaps or capital injections to banks. At last the government is listening to the market, since the structure of the TALF was something proposed by player (according to Market News). This is tremendously good news. Unable to force banks to lend—the one big missing ingredient in the Citi bailout and the earlier capital injections-the government has found a way to "incentivize" the banks. And it took only three months, if we count from end-August. For a country as big as the US with so many conflicting lumps of self-interest, this is actually not too bad.

Ironically and perversely, though, a workable initiative is dollar exchange rate negative, since it means global risk is down and opportunity is up. It’s nice to have greed plus fear back again and not just fear and fear, but some issues do remain-not the least of which is “Is it enough?”

We may get a hint today in the form of personal income and spending, with spending expected down a big 1% after -0.3% in Sept, according to the Bloomberg survey. Who ever heard of the US consumer reducing spending? We say the UK is about 9 months in front of the US on this and many other fronts. Household spending fell to a multi-year low in the UK and we probably have to expect it here, too. We also get data on durable goods order, new home sales and consumer confidence.

The other big factor is prospective interest rate cuts in the UK, Europe and US in December. Remember that rate cut were a currency favorable event in Australia (with the Australian Dollar exchange rate ralling) and the UK a few weeks ago, since they showed "responsiveness." If the ECB is seen as recalcitrant or dragging its heels, the euro exchange rate could get punished for that lack of responsiveness more than rewarded for having a favorable yield differential. (Foreign Exchange Traders dont need a reason to Sell Euros at the moment)

This is a topsy-turvy world.

Similarly, Foreign Exchange Traders will buy pounds if the Bank of England is aggressive, as seems likely. We are holding to our story that all the bad news is not out yet and any fresh instance of systemic failure will fall to the US dollars favor. This includes a retreat in equities, renewed weakness in commodities (especially oil), a big bank failure somewhere (anywhere), and so on. This doesn't even include all the terrible things that can happen in the political or natural world-riots, assassinations, earthquakes, and the like. It seems improbable that a giant rate cut in China will restore everything to conditions before. In fact, we think it really is a new era.

Downsizing is serious business.

We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

Bye For Now

Barbara Rockefeller
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the US dollar is not a dead duck

Foreign Exchange Outlook: Risk aversion could come flying back in the window when we get two bits of data this morning, the Q3 GDP revision (8:30 am EST) and the Conference Board consumer confidence index (10 am EST). GDP will likely be rived from -0.3% to -0.5%, while the confidence index was probably steady at 38 in Nov, the same as Oct, according to the Bloomberg survey. This is not a deterioration but still the lowest since records began in 1967.

It’s notable that while we all hear Obama talking about infrastructure spending as a big component of the stimulus package, focus remains on the consumer. Even the finance guys at the Fed and Treasury moved from saving their buddies at the banks first to consumer credit second (not the housing sector, which would have been more logical). But consumer spending is not going to get us out of this thing. The only way for that to have been true would have been Helicopter Ben throwing $24,000 out of the sky for every person in the country. The Obama approach calls for the industrial sector to be revitalized by government spending, whether it’s wind farms or road-building.

This could be the post-industrial industrial revolution. Nobody has the slightest idea what it will look like, but given technology advances, it will probably result (in five-ten years) in a tremendous increase in labor market productivity. We tend to think of productivity as how many widgets a worker can churn out in an hour, but in practice, the US is a service economy and it runs on trucking. Better roads and bridges, together with an improved national electrical grid, are a tremendous injection of value into the economy (buy UPS and FedEx). Besides, it will be fun to see whether it’s really true, as we saw with Eisenhower’s interstate highway system, whether government is sometimes the solution and not always the problem, the old Reagan mantra.

This is to a certain extent the basis of the new optimism - one way or the other, all these experts, under Obama’s leadership, will fix things. Well, no. These are the same experts who may have warned us of impending doom but failed to get action (Summers) or to instigate action (Geithner). It ain’t over yet and nobody can even tell us what inning we are in. It’s the proverbial black swan situation and optimism-in the form of giant stock index rises-is unwarranted. We believe in trends. The Dow was up but has not reached red resistance. It could be an aberration. The same thing is true of oil, although gold has a pretty scary chart-two gap openings in a row.

Assuming more dismal new releases are out there waiting to hit us over the head with some calamity or another, the US dollar is not a dead duck. As noted above, the case for the dollar exchange rate demise has not yet been proven. We do not doubt that it will be one day, but not yet. Keep the faith.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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We guess the US dollar will survive this round, too

Foreign Exchange Outlook : Everyone is looking at institutional factors like the Citibank bailout and hardly anyone is looking at macroeconomic indicators, but today we get existing home sales, probably a drop by 3.5% to an annual pace of 5 million. It will be the biggest monthly drop since Sept 2007, according to the Bloomberg survey. In the absence of a plan to stabilize the foreclosure rate and housing prices, the focus is in institutional failure rather than the economic consequences of the data itself. This is US dollar exchange rate negative. But can it be overwhelmed by an Obama spending plan due this week? Yes, but perhaps only temporarily. Spending itself is not enough you need a wide, deep and intelligent plan that everyone can believe in. Already we are seeing “anti-Keynesian” diatribes. Poor Keynes. He is getting blamed for a lot of things he never said or recommended. He did not say "spend your head off, debt doesn’t matter." Of course debt matters.

Without going further down that ideological road, consider the advice from some currency gurus who say “buy currency of creditor countries (like Japan) and sell the currency of debtor countries (like the UK and US).” This is like buying stocks of companies whose book value is greater than their stock prices. But countries don’t have book values. What counts is not the balance sheet, but the ability to generate cash. And here we have to consider not only the government and its ability to tax, but also the ability of private institutions, mostly banks, to generate the cash to pay the monthly bills and survive one more month. In the US, the TED spread (the 3-month Treasury rate vs. interbank LIBOR) is widening out again to 216 bp (according to Bloomberg), from the low in May of 76 bp and the worst-case high of 464 bp on Oct 10. The Fed is making funds available to just about every central bank in the world, including the Swiss and the Mexicans, but who comes first? US banks.

Longer run, the US printing all that money is an evil thing that will come back to haunt us. But in the immediate futures, like this week and next, it’s a powerful argument for the safe-haven status of the US to continue. Institutionally, perhaps the US doesn’t deserve the crown of safe-haven. The US is blundering badly. But in this matter of the crisis, it is still the leader-liquidity comes before solvency. We can worry about credit quality later.

How much money are we talking about? Bloomberg added up all the government programs and arrives at a figure of $7.4 trillion, or about half of US GDP. “Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.” The bailout includes the $700 billion in TARP; $2.4 trillion in commercial paper; $1.4 trillion from the FDIC to guarantee bank-to-bank loans; $29 for the JP Morgan takeover of Bear Stearns; $122.8 billion in addition to TARP allocations for AIG, and now $20 billion directly to Citi plus $306 billion of government guarantees for troubled mortgages and toxic assets.

Bloomberg writes “The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to CBO figures. It could pay off more than half the country’s mortgages.” Moreover, the Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion-this is what we should be worried about, not the $700 billion in TARP. Bloomberg is miffed because the government won’t disclose the collateral taken, with Bernanke calling it “unproductive” to disclose it.

It goes without saying that this is the biggest bailout ever, dwarfing the Chrysler version, the steel companies, the S&L’s, etc. Is it quibbling to ask whether it’s “investing” or “spending”? Probably not, since the rule of deleveraging together with bad credit quality means downsizing, i.e., permanent losses. We are all going to be made poorer by this, but in the end, what counts is the ability of the US government to sell the paper to get the money it needs to save Citibank and all the others. Can we do it? Yes. Britain is neck-and-neck on aggressive stimulus and other plans. Paulson did a bad job but the job is getting done. We guess the US dollar will survive this round, too.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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US Dollar and consumer spending is about to fall off the cliff

Foreign Exchange Outlook : We don’t like it that stock markets are the dominant factor in the currency market. It makes for weird effects and puts hard economic data and a sane perspective on the economy in a secondary position. This week we get a plateful of data, including PPI and CPI for October, along with the NAHB housing market index and Philadelphia Fed survey for November. But if some important company reports bad earnings, even good numbers would be overshadowed. It’s dumb and it’s dangerous. The one thing it may prevent us seeing in deflation in the US, as in the UK.

Deflation and fear of deflation has a funny effect on people. We simply do not understand a world in which prices fall, companies fail, and GDP contracts. Most of all, we don’t understand it when the US consumer stops consuming but if the outlook for employment is as dire as we see in the Empire State report yesterday, consumer spending is about to fall off the cliff. The domino effects reach into the darkest corners of the world.

This morning we get the Treasury report on capital flows for Sept, which was the evil month in
which Lehman was allowed to go under. The August report had shown an outflow of $400 million after an outflow of $33.6 billion in July, despite an increase in foreign purchases of long-term Treasuries and repatriation by US investors. Market News notes that over the past five years, US investors bought nearly $1 trillion in overseas stocks and bonds, more than in the previous 25 years, so there remains a lot to come home if that is what is happening. Some strategists say this is the important factor behind the US dollars rise.

For reasons we don’t like, the dollar exchange rate is likely to do okay in the near future. For some reason, the US dollar is not being punished for incompetent government. As long as stocks continue to slide and scare everybody, the US dollar is a safe haven. And in the perspective of “it’s worse elsewhere,” we have yet to see the worst occur in places like China and other emerging countries. India is still forecasting high growth next year, for example. These guys just don’t get it. When the US sneezes, the rest of the world catches not a cold, but pneumonia. At what point do we see geopolitical unrest arise because of slumping economies? If history is any guide, India and Pakistan should pick a fight with one another any day now.

Another factor is oil. Many countries have said $60 is the breakeven point at which social programs and subsidies have to be cut. Indonesia and Malaysia have already seen turmoil over this issue-what about Venezuela or Mexico?

Those who are long dollars should be careful what they wish for.

Bye for Now

Barbara Rockefeller
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