Wednesday, November 26, 2008

Euro exchange rate needs to match and hold the end-Oct high at 1.3300 to believe that the dollar rally is really over

Foreign Exchange Outlook : The US dollar is starting to make some gains this morning after losing 648 points in the euro exchange rate from last week to yesterday morning (1.2433 last Friday to 1.3081 at 9 am yesterday). This could be a function of the foreign exchange traders buying euros to an overbought level ("too far, too fast"), in which case it’s a correction that reaches support around 1.2860 and a 50% retracement around 1.2760.

That’s if the euro rate upside breakout is the real deal, which is the outcome we get in two of three model systems.

If the euro move up was itself a correction of the bigger and longer-lasting euro downtrend, we may have seen the end of the correction. How you see it depends on the timeframe of the chart you are looking at. In the model system shown in the charts in this report, we do not yet have a true upside euro breakout, although it’s pretty scary. Looking beyond the euro, we see prices crossing over the short-term moving average, linear regression, or previous intermediate high in many cases.

One thing that a lot of analysts agree on-we need to see the euro exchange rate match and hold the end-Oct high at 1.3300 to believe that the dollar rally is really over. The high yesterday was 1.3081, or about 220 points under the benchmark. We would need to see it get hit and held before next Monday, which is going to make the rest of this week and Sunday night a fingernail-chewing, hand-wringing ordeal. The US closes shop early today for the Thanksgiving Day holiday tomorrow and while banks are open on Friday, it’s another short day. So here’s the question: do the Asian and European markets have the guts to set the trend in the absence of the US?

Market News sums up the situation neatly: "Foreign exchange market players do not trust the stock market rally seen last Friday and Monday, and therefore have little faith that the gains seen this week in the euro, sterling, Australian Dollars and Canadian dollars will be sustainable. The rise in stocks was being viewed as a "bear market correction," with renewed equity slippage likely when the rally has ended." According, the dollar exchange rate should come back up when these markets fall back down.

A second factor is emerging - old-fashioned fundamentals. For once we are seeing the Foreign Exchange market react to economic data and institutional responses to the economic crisis and not only knee-jerk reactions to developments in related markets like stocks, the so-called risk aversion theory of exchange rate determination. Pounds Sterling, for example, is well down from its high of 1.5534 yesterday to a low of 1.5290 so far on the 0.5% drop in Q3 GDP and associated gloomy data that reinforces the prospect of some big rate cuts to come.

Risk aversion still has a good grip, though, and as usual, it can be seen best in the Japanese yen. Dollar vs Japanese yen slumped from the Monday high at 97.42 to 95.45 at the US close yesterday and thence to 94.69 overnight, although it’s bouncing upward ahead of the US open. Sterling to Japanese yen is right on its hand-drawn support line on the hourly chart and probably breaking it today. A 50% retracement would take sterling down to 143,10 from the high of 148.61 yesterday. Euro to Japanese yen is also floppy, having run up from 116.39 last week to 126.24 on Monday. So far it has touched the 38% retracement at 122.48 and may do it again today, in which case the expectation would be for a further correction to 121.32 (50%).

This doesn’t make the Japanese yen a runaway or a screaming buy. If Foreign Exchange Traders like what they see as a necessary and sufficient government response to crisis - i.e., if confidence is at least partly restored, the US dollar will be rejected as the safe haven as Forex traders feel comfortable taking on more risk. The yen will get sold as the other half of carry trades into the higher yielders.

But Market News Asia reports this morning that "The failure of Asian stocks to continue their recent rally led to concerns among investors, who then cut positions inyen crosses. UBS said "At present we continue to see firm market demand forsafe-havens and the general flight to liquidity remains intact and there doesnot appear to be any shift in the perception of U.S. paper to serve this purpose. In addition, the overwhelming force of de-leveraging is firmly in place,especially in a weak growth environment."

Confused? You’re not alone.

Seeing the dollar/yen or any other yen cross rates a barometer of risk aversion or risk appetite is not working out too wellthese days.

Bye For NowBarbara Rockefeller
Foreign Exchange Trading
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Berlusconi government will announce a €80 billion stimulus package

Euros Exchange Rate Outlook: German import prices fell 3.6% m/m in Oct, the most since records began in 1962. Import price inflation is just 2.9% y/y, the lowest in a year.

The EU is going to reveal a region-wide stimulus plan today, but the FT carries a confusing story on it that doesn’t contain any hard information other than that the EU will not follow the UK in cutting VAT. Bits and pieces are dribbling out. On Friday, the Berlusconi government will announce a €80 billion stimulus package, with an emphasis on employment. This week Sarkozy promised the French auto industry that he wouldn’t let them down.

French consumer confidence rose today while business confidence crashed yesterday. INSEE’s French revised consumer confidence index rose to -43 from -46 in Oct, a 6-month high. The Italian business confidence index dropped to 72.2 from a revised 76.9 in Oct, a 15-year low.

Euro Pounds exchange rate currently 0.8400

Barbara Rockefeller
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Bank of England will cut interest rates to 2.5% at the Dec 4 policy meeting

Pound Sterling Exchange Rate Outlook : GDP fell 0.5% in Q3 from Q2, the fist drop in 16 years, although as expected. Consumer spending led the way, down 0.2% (the most since 1995) and fixed investment fell a whopping 2.4%. On the year-over-year basis, consumer spending rose 1.1%, though. This is the least since 1995 but not negative. The GDP report results in revisions to previously reported data like industrial production, now seen down 1.1%, and manufacturing, down 1.3%, in both cases worse than –1% initially reported. Construction fell 0.7%, less bad than -0.8% in the initial report.

Bloomberg points out that unemployment rose at the fastest pace in 16 years in Oct and jobless benefits are being paid to the highest number of people since 2001, while inflation fell the most in 11 years (to 4.5%). Therefore, the BoE will cut rates to 2.5% at the Dec 4 policy meeting, according to the consensus forecast.

Pounds to Euros 1.1905
Pounds to Dollars 1.5348
Pounds to Australian Dollars 2.3440

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Barbara Rockefeller
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Monday, November 24, 2008

Spanish and French Interest Rates to Fall by 1 percent?

Euro Exchange Rate Outlook : The IFO Nov index of the business climate fell more than forecast to 85.8 from 90.2 in Oct, the lowest in nearly 16 years (Feb 1993). The “current assessment” fell to 94.8 from 99.9 in Oct, while "business expectations" fell to 77.6 from 81.4 in Oct. IFO’s Nerb said he doesn’t expect a rapid increase in unemployment, although there will be some, and he expects the ECB to interest cut rates by 100 bp.

In economic data, eurozone new industrial orders for Sept fell 3.9% m/m and 1.1% y/y.

On Friday, the flash estimate of manufacturing PMI fell to 36.2 in November from 41.1 in Oct and an estimate of 40.5. Today Bini-Smaghi said the eurozone was holding up pretty well and the new euro exchange rates level was pretty good for exports.

We don’t quite know what to make of such remarks.

Barbara Rockefeller
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Foreign Exchange Outlook for the Pound Sterling

Foreign Exchange Outlook for the Pound Sterling : PM Brown has said monetary policy is not the only tool and it’s time to engage fiscal policy. The FT has a hysterical headline about Chancellor of the Exchequer Darling targeting the rich with a new 45% top tax rate to offset what will be massive government spending, together with a cut in the VAT of £12.5 billion to goose consumer spending. Darling presents a “pre-budget report” to Parliament today. Bloomberg says it will entail new bond issuance of £138.1 billion (an all-time high).

The NIESR says the UK economy will grow only 0.8% this year and will shrink by 1.5% in 2009 for 6 consecutive quarters of contraction. It recommends injecting around 10% of GDP into the banking sector (from 2.5% so far) and cut rates by 100 bp (or more). It advises a stimulus boost of £30 billion, or 2% Of GDP.

Pounds to Euros last 1.1720
Pounds to us dollars last 1.5098
Pounds to Australian Dollars last 2.3300

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Barbara Rockefeller Foreign Exchange Trading
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Wednesday, November 19, 2008

Spanish Mortgage Rates to fall?

Euro Exchange Rate Outlook : It’s not clear that the ECB is on board with the themes of the day (deleveraging, deflation and downsizing). Yesterday Trichet said "I do not exclude that we will continue to decrease euro interest rates, if we have confirmation of the alleviation of risks to price stability." In other wrods, he wants everybody to think inflation is still the top priority and the bank needs proof it is falling before it will cut rates. Is now the right time to be trumpeting price stability as the only priority? The WSJ cites several foreign exchange analysts who say the ECB is moving too slowly. The Fed and Bank of England have moved much faster ,which is deemed appropriate for recession conditions. But the ECB points out that with the interbank market seized up, a cut doesn’t have much effect on activity. Still, the bank is expected to cut the first week of December by 50 bp to 2.75% and by as much as 75 bp by end-March.

Pounds to Euros currently 1.1950 to buy euros

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Barbara Rockefeller
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Tuesday, November 18, 2008

US dollar exchange rate is a little stronger against the pound and euro

Foreign Exchange Outlook : The US dollar exchange rate is a little stronger against the majors but continuing to slide against the japanese yen, albeit not yet to the crash-scenario level. The euro rose yesterday morning to a peak of 1.2761 around noon, but fell back into the close to 1.2641 and to 1.2570 overnight. Market News reports that a “major Dutch name” was behind the drop. Then the rest of Europe came in this morning around 4 am EST and pushed it up a bit.

More interesting is the US dollar to Japanese yen. From just over 100 near the beginning of the month (Nov 4), the US dollar to Japanese yen has slid progressively lower to 95.98 at 7 am this morning, punctuated by a spike to 94.44 last week. Conventional wisdom has it that the Japanese yen is destined to return to the low and beyond it to 90 or 85. The reason is that the Japanese yen is a safe haven for those to whom the yen is the home currency and those who seek refuge from riskier and higher yielding currencies/assets. Some currency analysts also hold the view that Japan will outperform the US and Europe in the current crisis, which is the triumph of hope over experience. The government said today that it will consider a bigger, second stimulus (when we don’t have clarity on the first stimulus plan).

But near-term, we see a hand drawn technical support line at 94.64 on the hourly chart, so we are in “prove-it” mode. Another facto rears its ugly head intervention by the BoJ, which some observers expect with full confidence if the yen hits 90. If the BoJ were not to sterilize intervention proceeds, money supply would rise, which is probably not a bad thing in the context of Japan’s contracting economy.

Pound Sterling continues to get a lift from profit-taking and some buying Pound Euros on the sense that it had been terribly oversold, but it lacks any real momentum in its own right. As for the oversold story, consider that it was at 2.0150 in July and fell to the new lowest low of 1.4555 last Thursday. A rebound to just over 1.5000 is not abnormal in light of such a crash, even if unsupported by the bad data released yesterday and universal expectations of huge rate cuts yet to come, perhaps another 200 bp. Market News notes that sterling buyers yesterday included Asian central banks. But a technical rebound has technical boundaries. Sure enough, the pound peaked right at the linear regression trendline on the hourly chart overnight (1.5090) and may be dipping now.

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Barbara Rockefeller
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More Interest Rate Cuts for the UK as deflation takes hold

Pound Sterling Outlook : The deflation scare is upon us, perhaps a little ahead of schedule. The UK reported that Oct CPI fell 0.7% m/m to an annualized 4.5%--from 5.2% in September. The retail price index (includes mortgage costs) also fell from 5% annualized to 4.2%. A RBC Capital currency analyst quoted in the FT says inflation has turned the corner and is now so accerlated that the UK risks CPI under 1% by the second half of next year. “With the risk of outright deflation therefore on the rise, we continue to see further imminent aggressive rate reductions on the part of the BoE. Our base case remains that of four back-to-back 50 bp cuts with rates falling to 1.0% by the end of the first quarter of 2009.” And a bigger cut at the Dec 4 meeting is still a possibility, too.

Bye for Now

Barbara Rockefeller
Forex Trading Reports

Pounds to Euros - Best Euro Rates contact IMS Foreign Exchange

Wednesday, November 5, 2008

Stark saying things are worse than we think in Europe

Pound Sterling is fascinating these days, first rising yesterday morning from 1.5598 at midnight to 1.6097 around noon, or 499 points in 12 hours - but then falling back to 1.5747 in the next 12 hours, only to bounce to 1.6047 again so far today.

What is causing these wild currency swings?

The reason seems to be that really bad data releases (see below) are inspiring forecasts of bigger-than-expected rate cuts tomorrow, maybe as much as 100 bp.

These days a big fat interest rate cut is currency-supportive (see Australian Dollar). Well, with Stark saying things are worse than we think in Europe, why isn’t the euro exchange rate getting the same boost? Possibly because nobody thinks the ECB would do anything as outrageous as surprise the market with a European interest rate cut of more than 50 bp tomorrow, and maybe not even that.

Maybe if the ECB cuts interest rates by 1pc we may see Spanish and French banks willing to issue spanish and french mortgages

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Barbara Rockefeller
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ECB expected to cut interest rates tomorrow

Foreign Exchange Technical Analyst Outlook : The move in the Canadian dollar is starting to look like a reversal move, even though we don’t have a moving average crossover (which lags). Momentum, breaking the old low and other indications all point to a foray to the channel bottom, if not beyond. The upmove in the Australian Dollar is similarly strong. Remember, for reasons nobody understands, the Australian Dollar often leads the euro so soon you can see foreign exchange traders buy euros. If we were to superimpose a chart of oil and/or the commodity index on the Australian Dollar, we’d probably see a pretty good apparent correlation.

On the euros to dollars chart, we are going to fall back on the old adage that it’s still a downtrend until a key level is taken out. We judge that to be 1.3102, the midpoint of the breakout bar on 10/30, and the highest high in the current swing, 1.3298. With the ECB expected to cut interest rates tomorrow, this seems unlikely unless the market perversely rewards the ECB for doing the right thing economically. The probability is not zero - see the Australian Dollar again. We also have a really bad US payrolls number due on Friday.

Is it already priced in?

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Barbara Rockefeller
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Bank of England to cut interest rates by 1 percent?

Pound Outlook : Ahead of the Bank of England action tomorrow, UK data continues to disappoint. Factory production fell 0.8% m/m in Sept for the biggest drop in 19 months. Output has fallen for 7 months for the longest losing streak since Thatcher (1980). Factory production is down 2.3% y/y. On the quarterly basis, output fell 1.3 q/q, the biggest drop since Q2 2001, which came right after 9/11.

In addition, the CIPS index of services fell from 46 in Sept to 42 in Oct, the lowest ever. The employment sub-index fell to the lowest since the survey began, according to Bloomberg. “Expectations” also fell to a record low, 50.8 from 58.2 in Sept. Some foreign exchange analysts say these terrible numbers will prompt a rate cut of more than 50 bp.

Pounds to Euros currently 1.2346
Pounds to Dollars currently 1.6180
Pounds to Australian Dollars currently 2.3288

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Barbara Rockefeller
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contact IMS foreign Exchange + 44 207 183 2790

Tuesday, November 4, 2008

The US dollar put in some solid gains yesterday during the US session, reversing an early rise in the euro exchange rate

Euro Exchange Rate Outlook :

The US dollar put in some solid gains yesterday during the US session, reversing an early rise in the euro exchange rate to 1.2893 to a low of 1.2572 by 6 pm. Market News says the market was exceptionally thin. But in Asia and Europe so far today, the euro rate is coming back up off the low to retrace about 75% of yesterday’s drop and we are suddenly newly wary of breaking yesterday’s high.

While we always have to be ready for a big countertrend moves, this one comes out of left field and we can’t find a decent explanation. Market News and Bloomberg both suggest that falling interest rate spreads and rising equity markets in Europe for the 6th day are a cause for acceptance of risk. But only yesterday the European Commission confirmed a diagnosis of recession. The ECB is expected to cut euro mortgage rates on Thursday. The US election will likely return a dollar exchange rate friendly Obama, although the prospect of a disputed vote may be causing harm, however small the probability of that outcome. To buy euros on rising stock markets seems a frivolous thing, doesn’t it? Calling it a "perception of risk reduction" is just putting semantic lipstick on what is still a pig.

The dollar to japanese yen is breaking yesterday’s high of 99.64 but only by a little. It’s a minor move up off the low late last night at 98.48, and barely worth mentioning except this is also the high from last week, and a higher high is always notable, even if the move lacks momentum. Many observers forecast a rise to the high before that at 103, and that would be a true breakout. Remember, a drop in risk aversion and embrace of risk is the only reason to believe in this scenario, and therefore a big new risk Event could reverse it in minutes. We say the market for yen crosses is not acknowledging the depth of the economic trouble to come.

The NKS has a story today on demand for "cheap euros" from Japanese retail investors. This accounts for a very big amount, unlike in the US. “The European common currency traded above 160 yen until late August, but it slumped to the 113 yen range on Oct. 24, when a deepening financial crisis in the eurozone sparked panic selling. The sharp fall prompted many Japanese individuals to buy euros for yen. Some were planning to make a trip to Europe in the near future, but many others were looking to lock in forex gains, apparently in the belief that the euro will recover its value against the Japanese yen sooner than later. Some of these investors formed a long line at a foreign-exchange corner of a major bank here last week. Demand for the euro was so strong that the currency remained in short supply at the branch throughout the week." The writer of the article disapprovingly adds, "In any event, the fact that many Japanese are opting to hold their assets in cash, albeit in foreign currency, appears to demonstrate a serius loss of investor confidence resulting from the ongoing financial crisis."

Pounds to Euros currently 1.2300

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Barbara Rockefeller
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Monday, November 3, 2008

Euro Exchange Rate : The European Commission said growth will slump to 0.1% next year

Euro Exchange Rate : The European Commission said growth will slump to 0.1% next year, having entered recession this year. It’s the worst growth picture since 1993. GDP will contract for three consecutive quarters this year for a full-year total of 1.2%, European finmins are meeting today in Brussels to try to figure out what to do. Bloomberg notes that “While France and Germany led European governments in committing a combined $1.7 trillion to protect the region's banks, and the European Central Bank now offers unlimited loans in an attempt to get credit moving, there has been no unified government response.”

EU Commissioner Almunia said the EU needs better coordination in some areas. The situation is "precarious" as demand from emerging markets is easing (goodbye., exports), although inflation pressure is also easing. The euro exchange rate is closer to fundamentals and the eurozone economy will reach bottom in mid-2009. Seven members will reach deficits breaking Maastricht/Stability Pact with deficits over 3% in 2009. In fact, the Commission will start the "excessive deficit procedure" against Ireland. Oh, and the EU will not allow any new members in until after spring 2010 - they might want some money.

In hard data, the eurozone October manufacturing PMI fell to 41.1 from 41.3 in the flash estimate and 45 in Sept, the lowest ever. In Germany, the October manufacturing PMI fell to 42.9 from 43.3 in the flash and 47.4 in Sept. It was worse in France--40.6 compared to 43 in Sept. Italy had the worst manufacturing PMI ever at 39.7, from 44.4 in Sept. A number under 50 means contraction.

Best Euro rate to buy euros currently 1.2400

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Barbara Rockefeller
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In fact, the weak pound has already delivered the equivalent of a rate cut.


Pound Outlook : head of the expected Bank of England interest rate cut this Thursday, the FT has a really interesting story on UK companies actually benefiting from the drop in the pound. If the Bank of England were to cut by more than the built-in 50 bp, it would boost stocks because of a currency effect. In fact, the weak pound has already delivered the equivalent of a rate cut. “A rough yardstick suggests that every 10 per cent fall in the pound against the US dollar exchange rate equates to 25 basis points in monetary easing due to the beneficial effect on exporters and the pressure it takes off domestic manufacturers at home.”

An astounding 41% of the FTSE 100 (market cap) report earnings in dollars, incuding oil companies, minign companies, banks and some pharmaceuticals. “Calculating an Foreign exchange related rule of thumb for earnings is tricky, given the lack of information about the denomination of companies’ cost bases and financing requirements. However, for dividends it is much more straightforward: every 10 per cent fall in the value of the pound to dollars adds nearly 4 per cent to UK dividend growth, all other things being equal. “

On the other hands, “JPMorgan estimates that adverse foreign exchange movements have pushed annual UK retail inflation up from 7.7 per cent in June to 10.5 per cent. Retailers may try to pass on these increases to maintain margins. However there is every chance that, in a deflationary world, consumers will respond by trading down or buying less. This puts retailers such as Next in the firing line due to the comparatively high prices they charge. However, on balance, sterling’s weakness should be a boon for UK stocks, albeit a limited one given the air of gloom surrounding global asset markets.”

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Barbara Rockefeller
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Buying Euros, Pounds to euros at best euro rates - Contact IMS Foreign Exchange