Euro Exchange Rates to hit 1.3000 vs US Dollar Exchange Rate

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The bandwagon is gathering speed, as we expected. Bloomberg reports Barclay’s Wu and UBS’ Yu have each cut their 12-month euro exchange rate forecasts (to 1.40 and 1.30, respectively). Gary Shilling predicts parity, which the euro exchange rates has not seen since 2002. At the core of these forecasts is the idea that the ECB will hang on to its current low rate for longer because so many countries will be falling back into recession due to budget austerity, including Spain and the other PIGS. The US, meanwhile, will be raising rates, even if last Thursday’s discount rate hike was not the bell-ringing.

We agree the euro rate is going to remain weak for a very long time to come, but we disagree with the idea that the ECB will be looking at recession data in some countries. The ECB looks at inflation data, period. There is nothing in the ECB’s past behavior that suggests it would refuse to hike rates if it saw inflation (and inflation expectations) rising to a dangerous level, recession in some members be damned. One size fits all, remember? Of course, recession by its very nature is non-inflationary, so the issue may not arise.

Not to be flippant, but Greece not being able to get data to Eurostat on deadline because its finance ministry is on strike to protest EMU-imposed austerity sums up the situation with stunning simplicity - worse than a SNAFU if something less than a full-blown Crisis.

Back on this side of the Atlantic, the Fed’s discount rate hike had a number of purposes, only one of which was to signal a readiness to raise "real" rates (Fed funds). One purpose was to take the punchbowl away from banks after many not only recorded big profits but also paid themselves 2007-level bonuses. A second purpose was to acknowledge that discount window borrowing had fallen back to minor levels, so the hike is a message to all and sundry that the crisis is over. A third reason, which may be wishful thinking although we hope it is not, is that the Fed wants to dampen commodity speculation. We have no way of knowing whether anyone borrowed 28-day discount window money to speculate in pork bellies and gold - it seems improbable, doesn’t it? - but an overall rise in the cost of borrowing does make managers re-consider risk/reward.

As one analyst put it, the discount rate hike didn’t bring forward a rise in Fed funds by one minute, and this is almost certainly true. The Fed is managing expectations, not engaging in monetary policy. The Fed has always played mind games with the market, and this is just another one. We get a number of Fed officials speaking this week, including Chairman Bernanke on Wednesday and Thursday. The expectation is that he will talk about normalization and decline to say much about monetary policy except that the discount rate move wasn’t it. The one to watch is San Francisco Fed Pres Yellen late today speaking on the economic outlook. She is the most straight-shooting of the bunch and often tells us the right perspective.

As noted above, a big move is almost always followed by a corrective move in the other direction as foreign exchange traders take profit, reconsider the reasons for the original move, and sometimes vote with their feet the other way if they perceive the currency is still oversold and more will be leaving the herd. This is called “fading the trend” and is very risky. We have had two such minor consolidations in recent weeks and they were exceptionally lame.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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Pounds Sterling and Euro Exchange Rate Outlook

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate rose from a spike low at 1.3721 early in New York to 1.3747 at the close, not really a convincing move. Overnight the euro high was only 1.3801 and since then, the euro rate slid to a low of 1.3679.

This would seem to suggest that the market is not impressed by whatever the upcoming announcement may have to offer. We are surprised - normally the forex market likes announcement effects and the ensuing tussle over whether it’s a credible announcement.

Japan is having a holiday today. Pounds Sterling dipped as low as 1.5555 overnight but is staging a recovery this morning on Middle East and Asian sovereign demand, according to Market News. All our long-term models switched back to a selling pounds position yesterday.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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Foreign Exchange Traders sell euros

CFTC Commitment of Traders Report: Speculators increased euro short positions to a record high since the founding of the euro,

European sovereign debt problem

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro to US dollar exchange rates is trading in a narrow range of about 1.3620 to 1.3720 since late Friday, having dropped during the US session on Friday from 1.3742 to 1.3582, an 8-month low. The euro exchange rate came back later in the day in the usual end-of-week position paring, albeit a modest one this time.

The WSJ reports that "The cost of insuring Greek and Spanish debt against default fell amid a lack of fresh bad news Monday. However, the debt problems of Greece, as well as those of Spain and Portugal, are expected to remain a dominant feature in currency markets. Last Friday's vote by Portugal to extend the spending powers of its regional councils aren't going to help either as this will make it more difficult for Lisbon to curb the country's budget deficit."

During Asian hours, the failure of G7 to say anything interesting or worthwhile did not escape the notice of traders. G7 is so far down the news list that you have to search hard to find out what they did say. The group did not talk about the European sovereign debt problem, although EU officials made some comments on the sidelines, and although Japan wanted to talk about China, the rest of G7 chickened out. G7 gutlessness pushed Asian stock markets mostly lower, although the dollar/yen is flat as pancake in a tiny range of 89.10 to 89.56.

The US dollar index made a giant leap last week, from 78.68 on Feb 3 to 80.68 on Friday. See the chart. It probably went too far and too fast last week. We know prices don’t move in a straight line so we must expect a pullback at some point, but after that, the index has the potential to reach the 50% retracement level at 81.86 in Feb or March.


Bye for Now
Barbara Rockefeller
Foreign Exchange Trading
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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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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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foreign exchange traders is out gunning for Pounds sterling

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate closed yesterday just under the magic round number at 1.4991 after hitting the high at 1.5021 before the US open, suggesting US traders were slow to jump on the bandwagon. The best euro rate made a new high at 1.5050, again overnight, on good data from Japan and China and despite a strong dollar policy statement in Tokyo from Treas Sec Geithner.

The change in attitude toward gold is interesting. You can’t follow currencies without knowing something about gold, and the only time when it was not dominated by ideologues and true believers was the run-up to over $800 in 1979 and 1980. Speculators joined the party then and are joining it again now, although this time gold is "just another commodity." According ot the FT, spot gold prices rose as high as $1117 before falling back.

Another curious development is in Pounds sterling exchange rates, which fell from 1.6754 to 1.6599 in a single hour yesterday on the news that Fitch sees the UK as potentially facing a sovcereign ratings downgrade (but probably escaping that fate upon fixing the deficit after the spring election). Pound to us dollars recovered yesterday after that shock and rose steadily, spiking to a level higher than the pre-Fitch level at 1.6799. But then it put in a giant downmove, again in a single hour, to 1.6625. Find an hourly chart if you can. Seldom can we see so clearly when a gang of foreign exchange traders is out gunning for sterling.

But the news from the UK is mixed. Job losses were less than expected, which was sterling-favorable. The Bank of England’s Quarterly Inflation Report said the CPI will average about 1.6% for the next two years, interpreted as meaning the Bank will keep rates on hold all year next year - and sterling-negative. But near-term, the BoE inflation forecast is for a possible pop over target. By now the market was weary of lobbing balls back and forth, and then Gov King spoke about 27 topics, among which was the observation that a weak currency has been of benefit to the economy, and that was the only thing the market heard.


Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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Buying Euros? Buy Euros at the best euro Rates! Get a quote for Buying Euros now!
Buying Dollars? Buy US Dollars at the Best Dollar Rates! Get a quote for Buying Dollars Now!Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates! Get a quote for Buying Australian Dollars Now!

Need to Buy Holiday Money? Buy Travel money at the best exchange rates visit http://www.travelfx.co.uk/ and save on your travel and holiday money needs

Contact IMS Foreign Exchange + 44 207 183 2790