US Recession (Risk) Points To Lower Dollar In 2008, But Discernable Selling Required.

I can’t remember a US recession where the dollar traded higher.  I also can’t remember when last the risk of a recession was so high and stock investors and traders and more than a few in FX were giddy about the upside in the New Year. 

I can’t remember a US recession where the dollar traded higher.  I also can’t remember when last the risk of a recession was so high and stock investors and traders and more than a few in FX were giddy about the upside in the New Year.  Decoupling debate aside, the Fed has plenty more easing ahead on top of the 100 basis points already put to work.  The sad thing is that so many out there believe what happens to real estate and now banks do not matter for the rest of the economy in light of all that the US exports to the rest of the world.  I think this crew is getting its maps/facts confused. The US is not an export driven economy and what happens to housing and banking will impact every aspect of growth before this plays out.   And the price of oil at $100 a barrel is irrelevant?  Not sure how other heat their homes, but my heating oil bill has gone ballistic along with the cost of filling up my car.  Moreover, the giddy crowd talks about subprime as a 2007 event.  This could not be further from the truth.  News fatigue aside, this will be the story of 2008 as well…more write downs, more losses, more defaults and more than simply mortgage driven (student loans, commercial real estate loans and credit cards).  Sure sovereign wealth funds can pump cash into weak banks to strengthen bank capital but it does not come free – high cost paid for the investment, it dilutes share price and sizeable ownership class are foreign governments.  Why too should we assume that the handful of SWFs will have an insatiable appetite for weakened banks?  It does not take too many SWF investments in the banking sector to get to lopsided portfolios.  

 

On Wednesday, US manufacturing ISM showed a dive in the overall index under 50 indicating a contraction.  Isn’t China demand for all things US going to keep manufacturing afloat?  ISM was down m/m for the sixth straight month and the last time this happened was in 2000-2001 which coincided with the last recession.  But manufacturing represents less than 20% of GDP, so why should we be concerned about manufacturing?  Housing is 5%…who cares.  This line of thinking attaches more significance to China buying Boeing aircraft and Caterpillar bulldozers than it does to GM, Ford and increasingly non-transport-related manufacturing for the domestic market.  

 

If the US jobs report for December due Friday comes in weak, it could be lights out for the dollar…well at least versus EUR, AUD, NZD, CHF, TRY and BRL.  I still think the dollar has lots of room to fall but 2008 is all about what currencies to be long…it pays this year to be discerning as opposed to 2007 when buying just about any currency apart from the yen made for a good trade.  GBP and CAD are not where you want to be long as the BoE and BoC are pressing ahead with rate cuts in light of weakening fundamentals.  On the EM side of things MXN is not where you want to be acquiring a long against a weak USD…Mexico is most at risk to a US recession.    Because it is not a lower-dollar-against-everything year, the downside for the dollar against “strong” currencies will not be as great.  But we should have a full two quarters of dollar selling versus strong currencies before the buck stabilizes…and it should take at least two quarters to test the decoupling proposition.

 

David Gilmore

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More