Buy Euros before Ireland Defaults?

The IMF may well be running Ireland by February, ifthe Irish budget "fails to convince the financial markets," warns economist Colm McCarthy in an Irish Independent story on Sunday. Thebudget is due to be released on December 7 and McCarthy believes that ifit does "too little" to convince the markets then the Government will beunable to finance itself, "which means an IMF/European bail-out andeconomic policy dictated from outside the country for the first timesince the State was founded".

McCarthy also warns that Ireland's cashreserves will diminish by spring next year unless they re-enter the bondmarket with an issue of up to buy Euros 5bln. However, the NTMA's Brian Lenihansaid: "The NTMA as the Exchequer is fully funded until late June 2011."He then added, "the Agency has decided not to proceed with the bondauctions scheduled for October and November. The NTMA will return to thebond markets in the normal way in early 2011."

The country's priority,as extolled by McCarthy, is to limit new borrowing in 2011, and to hope for a positive re-entry by Ireland into the bond market.

Visit http://www.independent.ie/national-news/mccarthy-warning-imf-is-at-our-door-2401372.html to read more




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Greek drama is a euro exchange rate negative

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

Greece may be losing whatever sympathy was building. Ireland already instituted heart-breaking austerity measures, as reported in the WSJ, demonstrating a real commitment to EMU membership. To rail against speculators and whine for better market pricing really cuts into whatever respect investors had for Greece. Those who complain about speculators are always the ones whose prior bad acts put them on the losing end of the trade.

This is not to say credit default swaps should not be regulated. Clearly they wreaked havoc in the housing market. But when it comes to sovereign credit default swaps, why should investors buying Greek bonds be deprived of insurance? We look forward to a lively debate on this topic. A good start is the editorial in the WSJ today that says "The bets against Greek solvency are the result, not the cause, of Greece's debt problems." We think European leadership in banning sovereign swaps is all hat and no cattle.

If the Greek drama is a euro exchange rate negative, so is the relative growth story. The Market News fixed income reporter says the bond gang is mulling over some wild and woolly forecasts, including a rate hike in June, probably unlikely but let’s not be surprised. Some are forecasting a giant rise in March payrolls at the April 2 release, as much 250,000 to 275,000 new jobs created. Unfortunately, April 2 is Good Friday when the stock market is closed and the bond market is open only until noon. You know that optimism is running high when foreign exchange traders start talking about the next payrolls only one week after the last one.

Optimism about the US economy is running high whatever the payrolls forecast. The Blue Chip Economic Indicators report says the economists in their survey raised the forecast for economic growth in March to 3.1% for the third straight monthly rise (although trimming the growth recast for 2011 to “only” 3% from 3.1%). Europe would be thrilled to get “only” 3%.

We do not agree with Wharton Prof Siegel that the ECB will stay its hand on raising rates because of structural problems in the southern tier, but we do think it will stay its hand because it needs to keep low-rate stimulus going and inflation is not a problem. In fact, deflation is still a problem, as an inevitable corollary to recession.

Until we get some additional hard data, like US retail sales (looking good so far), the market will be twitchy. The oil inventory report today could be a real factor—if oil goes up despite higher stockpiles, it would mean oil traders are back of the growth higher-demand-coming bandwagon. Unfortunately, this is either good or bad for the us dollar rate depending on whether the growth story is accompanied by its occasional sidekick, higher interest rates. We like the outlook for the dollar near-term, but first it must break hand-drawn red support around 1.3515.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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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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