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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Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate rose over 1.5000 around 5 am ET today for the first time since Oct 26 as the market voted with its feet on the unemployment rate Friday and the failure of G20 even to mention Foreign Exchange and specifically the yuan. Reuters says "G20 leaves door open for fresh pressure on dollar rate," pointing out that Brazil (and Canada) had said ahead of the summit that they would bring it up.

The FT says "Furthermore, a report from the International Monetary Fund also weighed on the US dollar rate as it named the US unit as the currency of choice for funding carry trades, in which low-yielding currencies are sold to fund the purchase of riskier, higher-yielding assets elsewhere. The report said that while the dollar had depreciated in recent months, it still remained on the ‘strong’ side.”

Bloomberg elaborates a bit more on the IMF report, which was published just as G20 was meeting. “There are indications that the U.S. dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the euro and some emerging-economy currencies.” Bloomberg reports "While the dollar [in real effective terms]'has moved closer to medium-run equilibrium,' it is still 'on the strong side.'"

The IMF also says the euro exchange rate “is on the strong side of its equilibrium.” Hello? How can the dollar be on the strong side and the euro be on the strong side, too? The IMF doesn’t view the ever-changing market price of the euro/dollar as the benchmark and is using other measures, based on baskets, to derive “real effective terms.” This may be fine for ivory-tower economists but is not at all good for an agency that should have a higher sensitivity to the real world. Finally, the IMF said the yuan “has depreciated in real effective terms in tandem with the U.S. dollar and remains significantly undervalued from a medium-term perspective.”

In a word, bah.

Pounds Sterling exchange rate is rising strongly this morning, to over 1.6800, on a story that Kraft has until 5 pm ET today to increase its offer for Cadbury. M&A has often been a driver of the pound in the past. In dollar/yen, though, Friday’s big drop (from 90.75 to 89.59) has not been matched so far today. Still, it’s a breakout under the previous intermediate lows and we now await whether it also surpasses the Nov 1 low at 89.17.

Bye for Now

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euro exchange rate at $1.50 is a disaster for the European economy and industry

“The euro exchange rate at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy. The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the us dollar rate on Tuesday before falling back on intervention fears.

What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the
price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Europe and Japan are now the last two blocs standing as everybody else lets their currencies
fall, or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s. Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the us dollar exchange rate since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets.

Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's
manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.

Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations.

Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to
stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia
clearly needs to sharply revalue against the West to right the system.

Professor Michel Aglietta from Paris University says the euro exchange rate is 40pc above its
purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004.

Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US
contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs and need to buy euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."

The European Central Bank could take some of the steam out of the euro rate by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly.

What is missing is a unified front of EU governments. Italy has been remarkably quiescent,
given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.

Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency
moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.

For the Full Story visit www.telegraph.co.uk

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Canadian Dollar exchange rate not reach parity with the US

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The important release today is retail sales at 8:30 am ET, which will set the tone for the day until corporate earnings start having their effect. The Market News forecast comes in at -2.1% with the range minus 1.3 to -2.6% - no positive number is even possible. Since August sales rose 2.7% (led by autos), the Sept results will mostly offset and probably cause doubts about such a joyous and heedless embrace of risk. Ex-autos, Sept retail sales may rise 0.2%, which is nothing to write home about.

We may get a pullback today, or we may not. We may get one Friday as foreign exchange traders stand back and look at what they have wrought (and take profits). Note that there is no particular sense of panic or crisis abroad in the land. The US dollar rates is falling for reasons we think we can identify and understand, especially the oil/gold story. As for perspective, why should the Canadian Dollar exchange rate not reach parity with the US? It may have a messy political landscape but it also has commodities galore and some very smart guys in the BoC with a tart tongue. The closest the Canadian dollar has come to parity is 1.1163 in 1991, by the way.

While we don’t have a problem with the Canadian , or even the Australian dollar exchange rates, we do have a problem with the Swiss franc nearing parity with the dollar. Nobody much pays attention to purchasing power parity these days, but the Swiss franc was already overvalued at 1.1500 (November 2007), so it must be wildly wrong at 1.0200. We may pay $1.50 for a Coke in Connecticut, but in Switzerland, it’s about $4.50. Eeek. Besides, the SNB is not amused at too-strong a Swiss franc, and while its main concern is with the swiss franc to euro exchage rate relationship, the best us dollar rate counts, too. The Swiss franc reached its highest ever against the dollar in March 2008 at 0.9639, the height of the financial sector crisis (and the stock market low). We would be flabbergasted to see the same crisis-level seen again--without a crisis. In fact, it’s been a while since we had something that could be named a crisis. We can’t forecast the unforecastable, but we can warn that crises are a regular feature of the landscape and we should not act as though a new one is not possible.

Pounds to US Dollars = 1.5948
Pounds to Euros = 1.0710
Euro to Pounds = 0.9339
Pounds to Australian Dollars = 1.7472

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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euro exchange rate continued its corrective dip yesterday from 1.4359

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate continued its corrective dip yesterday from 1.4359 Sunday night to 1.4271 after the US close as Asia was gearing up for a new day. The lowest euro low was 1.4250 at the Asian hand-off to Europe, whereupon the euro rates took off to the upside again to 1.4336 so far. You can chart the euro’s fortunes move-by-move to the US equity markets yesterday, with a new risk aversion becoming visible and helping as traders were buying dollars - but not by much. The euro rate recovery this morning also matches the rise in US equity index futures. Overnight, the euro rate drop is attributed by Market News to "Asian and Russian supply of euros, as this pair triggered stops through the Asian base in the $1.4270 area down to $1.4254."

The euro’s low overnight is attributed to the Shanghai Composite falling as much as 5.7% overnight, according to Bloomberg, closing down 2.6% after the CEO of China Construction Bank said excess liquidity in the Chinese economy is leading to asset bubbles. In Asia, foreign exchange traders were also influenced by a comment from a regional US banker that commercial real estate has yet to bite and will continue to bite next year.

As usual, the rise in risk aversion during Asian hours affected the euro/yen and dollar/yen the most. Market News reports that "The morning's drop in Asian stocks led to another wave of risk aversion, which put yen crosses under pressure, and led investors to seek shelter in US dollar exchange rate instruments. Euro-yen fell steadily through the morning session, from a high near Y135.25 to a Y134.23 low. Dollar-yen followed the cross down, falling from Y94.60 through Y94.00 to lows around Y93.92." But the dollar/yen made it only to 93.77 before bouncing back up to 94.43 after Europe came in.

Pounds to US Dollars = 1.6358
Pounds to Euros = 1.1414
Euro to Pounds = 0.8758
Pounds to Australian Dollars = 1.9521

Bye For Now
Barbara Rockefeller
Foreign Exchange Trading
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