We consider the Australian Dollar exchange rate outlook the canary in the coal mine,

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate is falling this morning from yesterday's high at 1.5050, which was hit ahead of the US open. We can see on the charts that many currencies, including the euro, closed down yesterday from the open and well off the high, with the euro rate and Swiss franc actually closing at the low or near it. This was a warning sign for today, and sure enough, the euro exchange rates has dipped so far to 1.4918 (at 7:30 am ET).

One report says that a large amount of euro to us dollars options at 1.5000 are due to expire today and players are pushing the euro down to avoid paying out. Market News reports that slipping European stocks this morning took the edge off the euro, while the euro also "came under pressure from Russian sales which helped to knock the pair down around 80-points to lows under $1.4930." Market News also names "East Europeans" as sellers with German names adding weight before running into Asian demand during the European morning.

Explanations for the euros downmove range from the mundane (the options) to the sublime (Chinese revaluation, oil prices).

At a guess, this is a consolidative move rather than an outright reversal, but there are some worrying aspects to it. For one thing, the high yesterday failed to match, surpass and hold the high at 1.5063 from Oct 25. Thirteen points isn't much of a shortfall but it’s still a "failure." Another issue is that so many traders like Fibonacci numbers that it would be negligent not to calculate them. On the 6-hour chart, we get a 50% retracement to 1.4840 and a worst-case 62% retracement at 1.4789. These levels could be reached without scaring the horses but any more would create a new environment.

The trigger for such a new environment might be the Chinese actually changing from the de facto dollar peg to a basket, as suggested in yesterday's People's Bank report. Most commentary says this is not a realistic expectation until the middle of next year, but the probability is not zero for such an Announcement at the APEC summit or next week after the Obama visit. Obama has said he is taking the currency issue very seriously and it will be discussed directly (along with other trade and finance issues).

A second idea is that when we get the US oil inventory report today, foreign exchange traders will take seriously that the risk of rising oil is so dire for economic recovery that some government somewhere may do something about oil becoming a "security" and alternative asset. We have a fresh warning from the International Energy Agency to that effect, with some additional analysts saying the price of oil is the whole ballgame for recovery. A return to bubble levels would stop the recovery dead in its tracks. This argument has a lot of emotional appeal and has the added virtue of being largely correct. The question is whether government interference is realistic (it’s not) or that enough speculators think it might be (possible).

But real economic events are still drivers, too. The Australian dollar jumped over 100 points to 0.9371 on release of the employment report (a rise of 24,500 when a drop of 10,000 had been forecast). Foreign Exchange Traders immediately jumped the conclusion that the RBA can raise rates a third time in December, even though it has never done three in a row before. It’s interesting that the Aussie Dollar has now given back all of the gain and lost a bit more from the US close yesterday. We consider the Australian Dollar exchange rate outlook the canary in the coal mine, leading the euro for reasons we have never nailed down.

The pound remains under pressure, evidently on BoE Gov King talking it down yesterday. The yen rose against everything as a bit of a safe-haven after Chinese Premier Wen Jiabao said “The worst is over. The global economy is starting to recover but a total recovery will be a slow and bumpy process.” According to Bloomberg, among others, this was taken to mean a safe haven might be needed. One analyst (Mitsubishi) says the yen is headed straight for 85 again, but this source has a tendency to draw straight lines off the smallest of moves. The latest weekly capital flow report from the Japanese MoF shows that Japanese investors are buying foreign bonds and equities for a total of ¥332.1 billion) while foreigners were net sellers of Japanese bonds and equities but buyers of money market instruments for a new outflow of ¥431.3 billion.

This doesn’t support a rising yen but it’s for last week, not this one.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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