The ECB has seemingly rejected quantitative easing even if it were allowable under treaty

Foreign Exchange - Currency Outlook

Not to be a prude, but we disapprove of a government not only encouraging speculation in dodgy assets, but lending money - lots of money - for the purpose. Moralizing aside, the release of the PPIP marks the beginning of the end.

The equity market is not wrong.

The commodity markets are not wrong.

FIFO is alive and well… the US was the first to go into crisis and recession, and will be the first out. The implications for the US dollar are not yet clear. The US dollar rate can still tumble on the inflation/currency debasement conventional wisdom, or come back on the idea that “it’s worse elsewhere.”

The question remains of whether it really is worse elsewhere. On the whole, we think yes, it is. Europeans are downplaying both the financial sector problems and economic consequences, and to deny is to delay. ECB policy member Likkanen threw out a few drops of cold water, saying the ECB still has room for conventional monetary policy actions (translation—rate cuts) and if the slump gets worse, it can also introduce additional "innovative instruments." Translation - nobody knows. The ECB has seemingly rejected quantitative easing even if it were allowable under treaty, so we don’t know what innovation Likkanen may have in mind. But it’s clear that slow as the US Treasury was to get remedial action going, Europe is farther behind. This is the perennial structural difference between the US and Europe, and it accounts for perennially slower growth in Europe, if greater social stability. If the euro exchange rate is getting support from a relatively higher interest rate structure and that is about to be reduced to a tiny margin if not to zero, what is support for the euro rate, again? Thus there is a small glimmer that the US dollars rise may not be over, once this corrective bouncing is over.

Pounds to US Dollars = 1.4579
Pounds to Euros = 1.0790
Euro to Pounds = 0.9268
Pounds to Australian Dollars = 2.0907

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!

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we need a strong euro exchange rate in the current crisis

Foreign Exchange - Currency Outlook

This morning we get US data that is sure to be a US Dollar negative, if the market chooses to heed it. Reuters reports that US housing starts probably fell to an annual rate of 450,000 units in Feb, another record low, after a drop of almost 40% in the previous three months. January's rate was 466,000, the lowest since the Commerce Department began keeping records in 1959.

This means speculative building has come to a screeching halt.

That's a good thing, isn't it?

It allows unsold inventory to get cleared. Reuters also reports that "Permits for future groundbreaking, which give a clue to construction plans, also are projected at a record low unit rate of 500,000 in February, down from January's pace of 531,000, which also was the lowest on record. Tight credit standards have made it more difficult for potential home buyers to get financing. And builders have cut activity sharply in an effort to whittle down a big glut of unsold homes.”"

The focus this weeks seems not to be on the US economy, though. Instead, the focus is on the euro exchange rate and the viability of the eurozone. Yesterday Trichet had on his cheerleaders' costume, telling an audience in Berlin that the euro rate is a "unique and irreplaceable anchor of stability and trust" and "Europe can rely on us to preserve that anchor." Also ,the ECB will "play as active a role as possible in the international financial institutions and international informal groups to which we belong." The ECB "always supports a multilateral approach." German Chancellor Merkel also said we need a strong euro exchange rate in the current crisis.

Does this mean European officials are willing to accept a too-strong euro at the expense of exporters to make their point that the euro rate can withstand a giant recession (the Friedman test)?

Yes, it would seem so.

Is it working?

Not really, if we consider the 8:30 move to near 1.2900. We expected a pullback but not to this extent. Now the euro rally is up for discussion. Many foreign exchange analysts had kept their forecast of a strong us dollar on either the safe-haven story of the FIFO story, so they will be vindicated if the move continues. We feel that all the stories are weak, especially the connection between equities and currencies. A prudent course might be to retreat to the sidelines as the euro bulls and bears slug it out.

Pounds to US Dollars = 1.4020
Pounds to Euros = 1.0798
Euro to Pounds = 0.8257
Pounds to Australian Dollars = 2.1207

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

Foreign exchange traders buying euros have created breakout to the upside is the real deal and it can extend to 1.3300

Foreign Exchange - Currency Outlook

Hope springs eternal in the human heart. Stocks are rising everywhere--maybe the crisis is over. Such a view accepts that the stock market is a reliable forward indicator of the economy, an old adage that has some weight but not, perhaps, in a special case like the one we have now.

The decisions at G20, if decision is not too strong a word, is that the US will continue to create gigantic public deficits that will accrue to the benefit of all while Europe (selfishly) will ramble on about restoring confidence via stricter regulation. The latest version of European denial and delay is that recovery can’t come until confidence is restored and the path to confidence lies through tighter regs. It's a plausible story but off the point entirely. (Note that Japan committed to spending 2% of GDP in stimulus at G20, and it can least afford the extra debt of all G7.)

Still, the market likes the outcome, as we see from the euro exchange rate rising over 1.3000 easily and quickly this morning. It also likes the Bernanke performance on TV last night. He said recovery is coming and probably this year. Let's see - higher US deficits in the US, the same deficits in Europe. Which does the global investor prefer? On the whole, deficits are not a deciding factor in determining Foreign Exchange levels except when they are. We believe that Foreign exchange traders buying euros have created breakout to the upside is the real deal and it can extend to 1.3300 or so, which is the 38% Fibonacci retracement of the euro slide down from 1.4719 last December.

The market likes Fibonacci numbers, so we have to accept it however basically dumb it may be.

Pounds to US Dollars = 1.4070
Pounds to Euros = 1.0875
Euro to Pounds = 0.8275
Pounds to Australian Dollars = 2.1307

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

Obama plans is what is driving the stock market downward

Foreign Exchange - Currency Outlook

We get the service sector PMI for the US today, presumably to show a similar contraction as the eurozone and at a fast clip. The Bloomberg survey gets a reading of 41 after 42.9 in Jan.

So what?

Do we not already know that the economy is contracting?

Far more important is how markets intend to deal with payrolls on Friday, and today, how they will respond to the new TALF news and other aspects of government initiatives. The political opposition continues to say that the Obama crowd is going about it all wrong and that lack of confidence in the Obama plans is what is driving the stock market downward. Even the normally sane Cramer asserted this idea. Obama responded badly, saying stocks markets gyrate but he is on a long-term path. Just one little comment to the effect that he is trying to restore free market capitalism (with tighter regulation) would have done the trick and changed the dialogue. Not saying it makes some people think he’s a pinko or a closet Commie.

Europeans sigh when they see this, but to be fair, Europeans like rigged markets.

Is it possible that market players are being overly influenced by the reporting?

Yes.

Instead of looking at earnings trends and other hard data, equity traders are obsessing about whether this plan or that plan fits in with some 10th-grade idea of "capitalism." It’s all a waste of time (like a lot of politics). Keynes was right and the Republicans are wrong. That doesn,t mean the current government is taking all the right actions or that the actions will work. It does mean that "expectations" are being skewed by ideology, and that is never a good thing. At some point this contentiousness may be a US dollar negative. Other dollar negatives are lurking in the shrubbery, including a possible rise in the price of oil, a political event, a terrorist act, etc.

We are a trend-follower and the US dollar trend favors additional gains, but it’s going to be an ordeal.

Pounds to US Dollars = 1.4000
Pounds to Euros = 1.1175
Euro to Pounds = 0.8940
Pounds to Australian Dollars = 2.1901

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

the US dollar is prettiest pig in the herd

Foreign Exchange - Currency Outlook

This week we get more data than we can possibly absorb or understand, let alone put into perspective. We get the ISM report for both manufacturing and services, personal income, NAR Home sales, monthly chain store sales, Fed Beige Book, the ADP estimate of payrolls and on Friday, the biggie -payrolls. Market News says the median estimate in its survey is a drop of

"605,000 jobs in February, from 598,000 in January and 577,000 in December. Estimates range from -750,000 to -535,000. The unemployment rate is expected to rise 0.3% to 7.9% in February, with estimates ranging from 7.8% to 8.1% From December 2007 to January 2009, non-farm payroll losses have totaled 3,572,000 (December 2008/January 2009 may be revised). As a point of comparison, during the 2001 recession, job losses stretched out to 2003, ending in a total loss of about 2.5 million workers."

Note that the US Treasury's "stress test" for banks offers assumptions about everything, including employment. The baseline scenario asks banks to evaluate their asset book on the unemployment rate at 8.4% in 2009 and 8.8% in 2010, or 8.9% and 10.3% in the pessimistic scenario. At least one analyst (Westpac) says the "Treasury's worst-case call on unemployment is probably too upbeat,” according to Market News.

We agree, especially since the other assumptions are also soft - real GDP down only 2% this year and a bounce up of 2.1% in 2010. Really? Market News says "The alternative adverse scenario is based on a 3.3% GDP contraction this year followed by a modest 0.5% recovery in 2010. Other Treasury assumptions were that house prices are expected to drop 14% in 2009 and 4% in 2010, in the baseline scenario. A worst-case scenario assumes a 22% drop this year followed by a 7% decline in 2010."

We say each number has to line up with each other and while we do not doubt the excellence of Treasury’s economists, these numbers seems to reflect a back room political compromise. If they told us the real numbers, we would all have a heart attack. This is exactly what happened to TARP, we suspect. There are not enough trillions of dollars to buy all the bad paper, and there are not enough trillions for stimulus and homeowner aid to keep GDP at only a drop of 3.3%.

But if they told the banks to estimate outcomes on a drop in GDP by 5-7% for three years running and the attendant unemployment and housing price numbers, we' all go crawl under a rock. There are times the government wisely does not tell the truth, and this is probably one of them.

Warren Buffett said over the weekend that the economy will be "in shambles" this year. We believe him. But if the robust US will be in shambles, imagine what condition other countries will be in. The US is still the least-bad and the US dollar is prettiest pig in the herd and it is not the time to buy Euros yet.

Pounds to US Dollars = 1.4029
Pounds to Euros = 1.1149
Euro to Pounds = 0.8965
Pounds to Australian Dollars = 2.2217

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

We wonder if confidence in the UK government is coming back

Foreign Exchange - Currency Outlook

The US Dollar Exchange Rates made a solid gain yesterday against the euro and this spilled over to other currencies as well. The euro rate made an overnight high at 1.2900 but failed to hold it, sinking to 1.2688 by mid-morning in New York. The euro has flopped around since then and risen to just over 1.2800 by 8 am today, but despite choppiness in a wide range, the euro exchange rate is on the defensive now. We need the euro to fall under the twice-hit 1.2680 area to confirm the downtrend. If we get it, the next move would be a test of last Friday’s low at 1.2555. With the ECB expected to cut rates next week, this may seem a no-brainer but nothing is ever a no-brainer in such a nerve-ridden market.

The dollar vs japanese yen is the highest since last November, breaching the round number 98 for a few minutes overnight. Bloomberg says gloom about another lost decade is rising, with fear over tomorrow’s unemployment and CPI data. Some foreign exchange analysts note an area of resistance at 98.90, which is the 50% retracement of the dollar drop from last Aug (110.66) to the Jan low of 87.13. We say it's an obvious target but with conditions in Japan worsening by the minute, why stop there?

A level of 110 can easily be imagined.

Pound Sterling closed lower on the day yesterday, making a big jump down from 1.4663 on Monday to 1.4171 on Wednesday during US hours, but is recovering a bit this morning on what Market News says is demand from a macro hedge fund. We wonder if confidence in the UK government is coming back, too. It just announced a very big and complex rescue plan for RBS that involves everything but the kitchen sink - capital injections, a bad bank, insurance, and on the side, a BoE commitment to quantitative easing, which can entail buying some of RBS’ toxic paper as well as others’.

Pounds to US Dollars = 1.4313
Pounds to Euros = 1.1219
Euro to Pounds = 0.8906
Pounds to Australian Dollars = 2.1901

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

zombie banks

Foreign Exchange - Currency Outlook

Bernanke speaks again today, and because he was influential yesterday, will get more attention this time despite the content of his remarks identical. Bernanke disapproves of the phrase "zombie banks" (which we think was invented by former FDIC chief Seidman, who still appears on Kudlow’s TV show). He will also reiterate that nationalization simply isn’t necessary - every bank can be managed somehow. To some extent, this is semantics. The government already has an ownership stake and it’s silly to equate what the US government is doing today or may do in the near future with the kind of nationalization that despots have carried out in the past - oil companies in Mexico and Venezuela, banks in France, and so on. There is clearly no intent to have Chris Dodd (say) dictate banking practice, even if he can limit compensation. Kudlow’s gang doesn’t doubt Bernanke’s sincerity but thinks he will turn out to be wrong later on.

Gee, do they have access to the vast amount of information the Fed has?

All of this talk of nationalization and the ideological divide it reveals is important because of its effect on public perception and investor expectations. As Keynes said, investor expectations have a decisive effect on investment decisions and the resulting interplay with the premium or discount on the rate at which investments get made. At this moment, everyone is in hoarding mode, from the consumer to the tycoon.

Gridlock is the appropriate word, and so is fear.

Again we feel that all the bad news is not out and nearly every instance of upcoming bad news is US dollar exchange rate - supportive, whether it's sovereign downgrades, the effect of Eastern European defaults on the Western European banking system, a shock from AIG, or something we haven’t imagined yet. Even delay by the US Treasury is vaguely US dollar - supportive. The one thing that is not dollar supportive is a rise in oil that, if sustained, implies faith in economic recovery. Good for the US ,bad for the dollar. What strange times we live in. We believe in trends and think the euro downtrend is real and will be sustained, but there is still a real possibility the foreign exchange market decides it doesn’t need a safe haven because the US will lead the world put of recession.

Pounds to US Dollars = 1.4207
Pounds to Euros = 1.1150
Euro to Pounds = 0.8960
Pounds to Australian Dollars = 2.1950

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