how long the swine flu panic will affect the financial markets

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

We honestly do not know how long the swine flu panic will affect the financial markets. A lot depends on whether the public health initiatives around the world are effective, or at least seem credible and trustworthy. As noted above, bird flu and mad cow panics were contained, mostly, by strong action in the countries of origin. Britain slaughtered hundreds of thousands of cows and China slaughtered many hundreds of thousands of birds. The prospect of the same thing happening to pigs is very sad; we happen to like pigs. Who didn’t like the movie "Babe"? According to the World Health Organization, SARS affected a total of 8,098 people worldwide in 2003 and of these, 774 died--the tsunami killed more people. Car accidents kill more people. Like SARS, swine flu is transmitted person-to-person. Restrict travel, make people wash their hands (and get banks to disinfect ATMs), and it could be short-lived. Not to be cavalier, but recent history teaches us that the world can contain this thing. The people who will end up suffering the most, including economically, are the Mexicans, where it seems the swine flu originated.

Once the panic fades away, assuming it does, we will be left with the same landscape we had last week. This includes probable rate cuts in New Zealand Dollars (this week) and Europe (next week). For some reason, this time the prospect of rate cuts is weakening the currencies, not strengthening them as has been the case of late. We are still clueless about "unconventional measures" the ECB may take. Yesterday Trichet spoke of "improving confidence and more favorable conditions." We say this doesn’t pass the reality check and must be a public relations exercise.

Today in the US, we get the Case-Shiller home price index for Feb, probably a drop of 18.7% y/y, a little better than –19% in Jan. Some economists say the pace of decline is slowing and the market is stabilizing. Well, perhaps, but we have yet to see unemployment at its worst, and surely that has something to do with home sales and prices, however much "affordability" improves. Conference Board consumer confidence comes out today, too, expected to rise to 29.9 in April from 26 in March, according to the Bloomberg median forecast. It had hit a record low of 25.3 in February.

An astute Market News reporter points out that the list of worries gets longer every day. We say there is a limit of how much adrenaline the body can pump before it gets, literally, exhausted. After the stupid airplane trick yesterday, foreign exchange traders don't have enough juice left to face all the stuff that will come flying over the wires. Tomorrow is the big day, with the Fed meeting, Q1 advance GDP, the Treasury refunding announcement, and even an Obama press conference in the evening - and that's just Wednesday. Commentators say the GDP number is probably the one to watch. Market News reports one analyst says "The market looks for Q1 GDP to come in around -4.7%, an improvement from the "massive" -6.3% contraction seen in Q4."

On Thursday it’s March personal income and spending (a more reliable metric than "confidence"), weekly jobless claims, the ECI for Q1, and the NY NAPM. Friday delivers the final April University of Michigan confidence index, March factory orders and April ISM. We may all be hiding under our desks by then. The main point is that the market is just about untradeable now. Any scenario is plausible. We could argue 'til the cows come home about whether the US dollar exchange rate "deserves" the boost it is getting from a tragedy, but the point to keep in mind is that bad news is dollar-friendly, and like to remain so. One fly in this dismal ointment is US equities, which are actually quite resilient, even if they don’t deserve to be on a hard-hearted look at earnings and other facts. A rising stock market has been, in recent months, a negative correlation for the US dollar.

We could see the US dollar correct sizeably today if equities come back.

Pounds to US Dollars = 1.4650
Pounds to Euros = 1.1122
Euro to Pounds = 0.8987
Pounds to Australian Dollars = 2.0643

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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