Monday, November 30, 2009

We could issue a sell signal in the Australian Dollars to Japanese Yen,

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

Last week before the Thanksgiving holiday, we wrote that the Fed gave the market an excuse to sell dollars by speaking of the US dollar’s decline as “orderly.” It’s not clear (and probably never will be) whether the Fed actively wants a lower dollar or was simply accepting a fact of life - that until it raises rates, the US dollar rate will fall. To give the Fed its due, it was probably unhappy about the dollar becoming a safe-haven play last week and Fed officials no doubt huddled with BoJ officials and their Treasury - MoF counterparts on whether to intervene. It seems clear from the incoherent and inconsistent statements from Japanese officials that the US declined to participate.

It’s hard to say whether the Dubai story will become a bigger contaminant of all emerging markets or a one-time aberration. At a guess, it’s a one-time thing and the UAE, which has ambitious plans for the region to become a financial center rivaling New York and London, will fix it quickly and quietly, and we can all go back to worrying about China. Dow Jones has a story that the UAE may guarantee the Dubai World debt, all of it. This would be better than the bank liquidity plan already offered. If so, safe-haven flows into the yen will be short-lived, too.

The Dubai saga reminds us once again that the world can always deliver a Shock and on the whole, Shocks are US dollar exchange rate -favorable because they inspire an emotional safe-haven impulse. Something that is a lot less clear is the effect of underlying fundamentals on trading activity. We tend to complain that traders are short-sighted and interested only in their own bottom line, not first-class economic analysis (which is why first-class economists are lousy forecasters and worse traders). But foreign exchange traders have one characteristic that puts them back in the real economic world, and that is penchant for pointing out that the emperor is not wearing any clothes. In today’s market, we say the naked emperor is the Swiss franc, which breached parity last

Wednesday before the holiday at 0.9911. On Friday it bounced, hard, to 1.0076 and this morning it’s back to 0.9990. As we have noted before, Switzerland is always more expensive than its neighbors, but parity with the dollar is, economically, ridiculous. At some point the Swiss franc will be seen as overbought and then watch out.

This week is full of scheduled events, including retailers reporting on Black Friday, vehicle sales, the Bernanke hearing, another 10-year auction announcement, and more - but the biggie, as always, is payrolls on Friday. We don’t have forecasts yet but they will start coming today and up to Wednesday’s ADP Macro release for the private sector. With the UK fretting about a double-dip recession, should the US be fretting, too? Probably not, because there is still plenty of undisbursed stimulus money to be spent, even if Q3 GDP data still overstates the recovery so far, as most economists think.

Some politically-minded analysts say the Obama administration has until March to get employment up or the mood will turn decisively down, and mood counts. We are not so sure, since all the forecasts are for employment to keep falling for longer than March. So, perhaps the payrolls report will not have as big an effect this time, and retail sales will be a bigger factor. So far we know more people went shopping but they spent less per head than last year, not a big help, analytically. Clothes are not of interest but electronics and toys are hot. We continue to find it really weird that the US shopper is setting the tone for the global economy.

At a guess, the US dollar rates will resume its downtrend and the biggest winners will be the currencies that got the knee-jerk sell-off, especially the New Zealand Dollars and the Australian Dollars, but the charts are very scary. We could issue a sell signal in the Australian Dollars to Japanese Yen, for example, based on our rules. We didn’t do it because the end of last week was extraordinary, but were the market darlings to lose favor, we could get a re-shuffling of the deck that could (at least temporarily) favor buying US dollars.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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