Category: US Dollar

Fannie Mae and Freddie Mac in Death Spiral

Fears that mortgage backers Fannie Mae and Freddie Mac may collapse and have to be taken over by the US government caused a wild day in the US stock market and the forex markets on Friday. The growing fear is that the two mortgage guarantee firms may have entered a death spiral state of decline.

Fannie Mae and Freddie Mac shares have been hammered this year as the mortgage and US housing crisis have deepened. Fannie Mae and Freddie Mac together insure about 50% of the mortgages in American which runs into the trillions of dollars. Both companies have had their shares prices slammed over the past year, having lost over 75% of their value.

Should the government have to intervene, either by taking over the companies or by providing massive amounts of additional funding the implications for the US dollar are profound. A taste of what to expect was served up Friday as the Euro rose to above 1.5925 to the dollar and is in easy striking distance of making all time highs just above 160.00

The amount of money involved with any US government “bail out” of Fannie Mae and Freddie Mac is just so enormous and the financial impact of losing the home mortgage loan guarantees so profound that the AAA credit rating of the US government itself could be called into question.

In any event, additional massive dollar creation in an inflationary environment would likely create panic selling of US dollars against every other currency in the forex market. If you are a forex trader keep your eyes on Freddie Mac and Fannie Mae. Events could quickly spin out of control over the next few weeks.

Euro bulls has a disappointing hugely unprofitable day on Thursday, July 3th, with the release of the ECB interest rate decision and the US NFP data.

Even though the ECB increased the interest rate as expected to 4.25% and the NFP job loss figures at 62,000 were as expected the Euro made a stunning reversal of over 200 pips from its high of 159.09 reached immediately after the ECB announcement and closed below 157.00.

The Euro made a new two month high above 159.00 and within minutes was trading at a stunning weekly low. Of course the problem was that the ECB rate increase to 4.25% and the NFP figure were widely expected. The Euro had advanced on the anticipation and sold off almost immediately with the news. There really should be no surprise in that trading pattern as you see it over and over again. The surprise was in the degree of the sell off.

While one can not say that a long term high was put into place such a strong violent reversal should put one on alert that a reversal is a possibility. Perhaps we will see the Euro trade back down into the 154.00 region and will be able to make a better call from there.

For now I would be wary of being too bearish on the US Dollar. While all of the news is bad the price action on Thursday and while the US market was closed on Friday should be respected.

Perhaps a Euro reversal is in the making. Next week’s trading pattern should make that clear.

The forex market give Bernanke and the US government clear notice last week that it will take more than talk and a few speeches to improve the prospects for the US Dollar.

The Euro closed the week at 1.5625 against the beat up Dollar after trading as low as 1.5300 immediately after Bernanke’s remarks that the Fed would be paying more attention to inflation. The Yen strengthened to finish the week at 107.25 after trading as low as 108.55.

Dollar bears are not impressed with what Bernanke and company at the Fed say about supporting a strong Dollar. And they are even less impressed at Secretary of the Treasury Hank Paulson’s frequent announcements that the US supports a strong Dollar policy. Forex traders think of Paulson’s pronouncements as more of a long running bad joke than a serious statement of US Dollar policy. It will take strong vigorous action on the part of the Fed to keep the Dollar from really tanking as 2008, the year from Hell, roars on by.

But what is the Fed to do? US policies over the past many years have lead to a weak economy and rapidly increasing prices. The situation is even worse than stagflation as it appears that the economy’s weakness will turn out to be more than that. Prospects for a rapid recovery in economic conditions are not good and things could become much worse. The “D” word has to be entering at least the back of the minds of businessmen and homeowners.

How long will new found strength in the US Dollar continue? To venture a guess I would say perhaps longer than you would reasonably expect looking at the condition of the US economy and the price of crude oil.

The Dollar has put in a strong performance this week as bad news about the US economy was not as bad as the market expected. The Euro traded as high as 158.20 as recently as Monday, May 27 (US markets closed for Memorial Day) and is trading down to 1.5490 as I write on Wednesday.

The dollar has also put in a good effort against the Yen, trading up from lows of 103.25 to highs of 105.86 so far today.

A little better than expected show of growth in the US economy and the apparent end of the Fed cutting interest rates seems to be behind the Dollars strength this week. The US GDP growth figure for the first quarter of 2008 was revised from up 0.06% to 0.09%. Recent comments from Fed governors suggest that the Fed is becoming increasingly concerned about an increases in the US inflation rate and that further interest rate cuts may not be forth coming at the June Fed meeting.

The Dollar cleared resistance with the Yen at about 105.45 this morning and seems to be good to go to 106.50 or so on this move. A breakout above 106.50 could clear to way for the Dollar to push towards 110.00.