Implications of a 'Failed Detroit' Are Hurting the Dollar

It may be premature to call the recent currency developments a paradigm shift, but it is worth shedding light on these changes as the news from Capitol Hill overlaps with thin trading volumes. The current weakness of the US dollar is not only taking part against higher yielding counterparts such as the commodity currencies (which was usually a sign of improved risk appetite), but also against the Japanese yen. Since the intensification of the market and economic weakness, the greenback would gain versus most major currencies with the exception of the yen during curtailed appetite, while losing ground versus its higher yielding counterparts and weighing on the yen at times of improved risk appetite.

But the last 4 trading days are witnessing a gradual retreat in the US dollar, which is extending across USD/JPY as US equity indices exhibit more valiant attempts of securing a bottom. With potentially market-punishing economic reports mainly out of the way for the year, the main focus remains on Capitol Hill's final package for US automakers.

This is clearly highlighted in USD/JPYs inability to join EUR/JPY, GBPY and other yen crosses higher as it was customarily the case over the past year. The notion of broadening dollar weakness is explicitly reflected in gold's rally past the $825 mark, which is the first 5-day winning streak since September. We have long argued that in order for gold to mount a more credible rally (beyond $850), downside US risks must be a stand-alone phenomenon (not joined by negative news in Europe and Asia).

The daily revelations of US automakers' struggling foundation and the implications their potential failure is raising transform the risks into a US-specific risk, hence, bullish for gold. We have seen this during the failure of Lehman (LEH) and the near failure of AIG. The implications for a "Failed Detroit" are enormous for the US economy as the auto sector is the biggest buyer of US steel, aluminum and even plastics and rubber. The industry employs over 240K direct and 5 million indirect workers and provides healthcare for 2 million employees. The auto industry's overall contribution to GDP is about 4%, with 12 billion annual spent on research and development.

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Consequently, the dollar weakness is manifested across the board, even against the struggling GBP. But going back to EUR/USD, the currency's quiet comeback is no longer latent, as the $1.30 is breached and en-route towards $1.330. A breach above will encounter the next obstacle at the7-month trend line resistance of $1.3450, which could prove considerable for this week. Nonetheless, with the event risk of Friday's US retail sales and next week's CPI, the $1.37 high target for the year remains viable. The trend line support of $1.28 becomes a backup foundation for $1.29.

EUR/GBP did the inevitable and broke to 0.8897. Oscillators suggest a temporary retreat is in the works near 0.8940-50, which could take us down to 0.87 before a renewed recovery towards 0.9300.

EUR/JPY remains the least bullish of the major euro pairs as the yen imposes its will on reluctance to buy risk abundantly. The pairs' contrasting developments with USD/JPY bolsters the argument for higher gold. Technicals suggest further upside towards 123.80, followed by the 50-day moving average of 124.

USD/CAD continues its downward course in line with the week's CAD analysis as the combination of improved risk appetite and higher commodities removes obstacles from CAD bulls. The argument that this week's bigger than expected 75-bp cut may not be succeeded by more easing for some time is also providing more long term solidity for the loonie. Thursday's break below $1.2520 marks the breach of a major 2-month trend line support (extending from the 1.0316 low), which could pave the way for 1.2230.

Comments

[NOWHEREMAN:]

You are paying way too much attention to Fundamentals. Charting ignores Fundamentals.

The Euro has broken above the resistance line in place since the end of October indicating a measured move up to the 1.375 area.

Meanwhile gold: drawing a parallel line above the uptrend line implies a move to longer term resistance in the 880 area.

What would breaking through that possibly imply?

I know what it would mean to myself, but am curious to find out what your purely Technical Outlook is, Fundamentals aside?

The "Failed Detroit" is not hurting the dollar. Unless you mean in re the Yen which you do not have a chart of. As a matter of Fact the dollar is slightly stronger against the Euro in overnight trading.

The Dollar was hurt by the Move in Oil. Oil is retracing, the dollar is strenghtening. IMHO

2008 Dec 12 05:17 AM

[StockMarket...:]

Failure of the big three was inevitable. So congress probably did the right thing by killing the deal. However the timing is unfortunate, given that it is happening right before Christmas. I guess we will soon find out how desperate the car companies really are - they are so used to hand outs ...

2008 Dec 12 08:03 AM

[EUARTE:]

The reality is that bankruptcy is the road for a strong auto industry. This would be a reorganized Detroit and the foreign manufactures in the United States. Combined they will be a powerful industrial component.

Alas, this reality is not the short term perception and may, short term, influence the dollar in a negative manner.

It is ironic that the United States was a main cause of this world wide mess yet may come out stronger than ever. The EU will remain weak for a long time saving the power of the dollar. This will give Washington time to put it's debt in order.

Under Obama, with his expensive spending plans, may kill this. We shall see.

2008 Dec 12 08:27 AM

[NOWHEREMAN:]

GM killed itself.

According to its last 10K, it had about $16 Billion in Cash.
The burn rate was $2.3 Billion per Month.

Since Ford did not experience a significant deterioration, I have to assume GM's burn rate either Tripled or the money went elsewhere, for it to require $4 Billion until months end.

If it had not injected $9+ Billion into GMAC in an effort to get it into Bank Status, it would not be in its present position. The attempt failed but if it had succeeded, GMAC would have been able to access TARP funds to bail GM out. IMHO

2008 Dec 12 08:46 AM

[NOWHEREMAN:]

One other thing, LIBOR has dropped dramatically over the past few days. That could also mean risk aversion is dropping and the flight to the dollar ending.

2008 Dec 12 08:52 AM

[Smarty_Pants:]

Dollar's recent weakness might have something to do with the fact that the gub'mint signed on for over $8 Trillion in potential costs to 'save' the economy and is considering even more costs.

I'm thinking this sort of massive print and spend campaign would be seen by foreign creditors as a risk of loss in value for their dollar denominated holdings in the future. Everyone knows it's coming, but nobody wants to acknowledge the elephant sitting in the middle of the room.

2008 Dec 12 09:32 AM

[NOWHEREMAN:]

except the guy whose feet can be seen, and he doesn't care anyway.

2008 Dec 12 12:57 PM

[Robert Nabloid:]

It's probably better than GM and others file for bankruptcy to give them a REAL chance at reorganizing enough to become competitive. How else will they fix the balance sheet enough to make a lasting difference? Giving them a few billion won't fix things - they had a lot of money in the bank and they still blew through it. We need the companies like GM to file for Chapter 11. It's ugly, but Chapter 11 can work and it exists for a reason. That doesn't mean the end of GM. I love GM btw.

The Dollar looks very risky from where I sit. The $8 T is just the beginning. I guess we will have to wait and see how much else gets pegged onto that.

2008 Dec 12 03:48 PM

[UbaTuba:]

Thanks for the thoughtful article. Observing risk implies ascertaining how to counteract it, then acting to mitigate the problem. So here's something I've been wondering about: Since the dollar may fall precipitously, then what are the potential benefits & hazards of the following approach to risk mitigation?
(1) A person is invested in foreign stocks on a foreign exchange with foreign dollars.
(2) A person is invested in foreign stocks via U.S. Dollars, because those stocks were purchased on the American Exchanges.

Does (1) offer a tangible benefit over (2)?

2008 Dec 12 04:40 PM

[UbaTuba:]

Thanks for the thoughtful article. Observing risk implies ascertaining how to counteract it, then acting to mitigate the problem. So here's something I've been wondering about: Since the dollar may fall precipitously, then what are the potential benefits & hazards of the following approach to risk mitigation?
(1) A person is invested in foreign stocks on a foreign exchange with foreign dollars.
(2) A person is invested in foreign stocks via U.S. Dollars, because those stocks were purchased on the American Exchanges.

Does (1) offer a tangible benefit over (2)?

2008 Dec 12 04:40 PM

[countrycuz:]

Phil Grande could not have said it any better


On Dec 12 05:17 AM paultaut wrote:

> You are paying way too much attention to Fundamentals. Charting ignores
> Fundamentals.
>
> The Euro has broken above the resistance line in place since the
> end of October indicating a measured move up to the 1.375 area.

>
>
> Meanwhile gold: drawing a parallel line above the uptrend line implies
> a move to longer term resistance in the 880 area.
>
> What would breaking through that possibly imply?
>
> I know what it would mean to myself, but am curious to find out what
> your purely Technical Outlook is, Fundamentals aside?
>
> The "Failed Detroit" is not hurting the dollar. Unless you mean in
> re the Yen which you do not have a chart of. As a matter of Fact
> the dollar is slightly stronger against the Euro in overnight trading.
>
>
> The Dollar was hurt by the Move in Oil. Oil is retracing, the dollar
> is strenghtening. IMHO

2008 Dec 13 08:15 AM

[countrycuz:]

i would think more of GM if they made their cars to where you could get at the heater core from under the hood instead of taking the dash apart like on a Chevy S10. thats a 900 dollar repair to replace a 70 dollar part. and when you examine the new heater core you can see where its designed to fail at. intentionally!


On Dec 12 03:48 PM Robert Nabloid wrote:

> It's probably better than GM and others file for bankruptcy to give
> them a REAL chance at reorganizing enough to become competitive.
> How else will they fix the balance sheet enough to make a lasting
> difference? Giving them a few billion won't fix things - they had
> a lot of money in the bank and they still blew through it. We need
> the companies like GM to file for Chapter 11. It's ugly, but Chapter
> 11 can work and it exists for a reason. That doesn't mean the end
> of GM. I love GM btw.
>
> The Dollar looks very risky from where I sit. The $8 T is just the
> beginning. I guess we will have to wait and see how much else gets
> pegged onto that.

2008 Dec 13 08:30 AM