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Forex and Existentialism
When you think of existentialism, do philosophers like Jean-Paul Sartre and Albert Camus come to mind? Now, you can add the name "Airbus" to this list. It was shocking to hear the CEO of Airbus SAS comment last week that his company faces possible extinction because of the weak U.S. Dollar. Despite record sales of aircraft, Chief Executive Officer Tom Enders told Airbus representatives in Hamburg, Germany that the Euro/U.S. Dollar exchange rate is "life-threatening" and has "passed the pain barrier." Echoing these comments was EADS chairman Louis Gallios, who told a German news magazine, "On this basis, we can no longer plan effectively for the future." EADS is the parent company of Airbus SAS. Added Gallios, "It is very clearly an existential threat".
Airbus prices its planes in dollars, which reduces the value of sales when converted into Euros. However, the company incurs the bulk of its expenses in Euros. The Airbus business model assumes a EUR/USD exchange rate of 1.3500. As you can see from the chart, we are well beyond that point, with the EUR/USD currency pair getting within 40 pips of the 1.50 handle on November 22 before pulling back to near 1.48 (see figure 1).
Figure 1: EUR/USD on an incredible trajectory since August. Source: Saxo Bank
I know what you're thinking – why doesn't Airbus just hedge themselves, so that if the Euro continues to rise and the USD continues to fall, they will profit from the movement in the exchange rate, and therefore offset any currency risk? Good question. Enders' answer to the unfavorable exchange rate is to cut Airbus' huge research and development programs, valued at around 2 billion Euros. Many jobs would be lost along with the cuts in R&D. Blaming the falling buck gives Enders a politically acceptable reason for pushing for deeper job cuts that the company's powerful French and German labor unions are likely to oppose. Labor leaders are wise to this ruse, calling Enders' comments about the strong Euro leading to the demise of Airbus "absolute nonsense."
Meanwhile, there is another side to this coin; U.S. aircraft manufacturer Boeing just announced that, with more than a month remaining in the year, they have broken their sales record for the third consecutive year. Companies like Boeing, Caterpillar, and John Deere, which enjoy a tremendous amount of sales to foreign countries, are some of the main beneficiaries of the weak greenback.
Intervention
All the while, European exporters like Airbus are feeling the pain. Will Jean Claude Trichet, head of the European Central Bank, finally step in and start buying U.S. Dollars and selling Euro, in an attempt to reverse the exchange rate? This act, known in the currency market as an intervention, is not out of the question, and will become more likely if EUR/USD breaches 1.50. Mr. Trichet is already signaling that such a move is a possibility, and his comments last week showed his unhappiness with the current exchange rate. "I am against abrupt, rapid and brutal movements," said Trichet. "Sharp currency movements are not in favor of global growth and I don't welcome brutal moves. This is what I have said, I don't withdraw any of it." Such tough talk - also known as 'jawboning' - can be interpreted as a precursor to official action, but central bankers like Trichet would much rather let traders do their work for them, in this case by convincing us to sell Euros. Central bankers know we're watching and listening, and they tailor their comments carefully to generate a specific reaction. Traders will keep a close eye on Trichet's rhetoric to see if he continues to try to 'talk the Euro down.'
What's Up With The Pound?
While currencies like the Euro continue to hammer the USD, the British Pound has been quiet lately. Compare the EUR/USD chart above to this chart of the GBP/USD, and you'll see that after a wild run, this pair pulled back sharply and has been drifting aimlessly for the past few weeks (see figure 2).
Figure 2: GBP/USD is well off of its highs reached earlier this month. Source: Saxo Bank
Why has the U.K. currency, so strong earlier this year, lost a bit of its luster? It's beginning to look more and more as if the Bank of England is going to follow the Fed down the interest rate cut road. The prospect of lower interest rates drives money away from a country, causing that country's currency to weaken as fixed income investors seek out more favorable returns elsewhere.
U.K. quarterly growth is slowing, as GDP in the 3rd quarter has been revised downward, from 0.8% growth down to 0.7%. The annual rate of growth was also lowered, from 3.3% down to 3.2%. This slower growth, combined with the fear of contagion from the seemingly endless credit crunch, has the Bank of England back on its heels, trying to prevent a repeat of what is happening in the U.S. in terms of the housing market. Additionally, there is still a tremendous controversy over the handling of the Northern Rock fiasco, the U.K. bank bailed out by the Bank of England earlier this year after customers lined up in the streets for an old-fashioned "run on the bank." By cutting interest rates, the Bank of England would be sending an important signal to wary markets that it is indeed ready, willing, and able to provide additional liquidity if needed.
No Longer Hanging By A Thread
In last week's article, we discussed the U.S. Dollar - Japanese Yen currency pair and its battle at the support level of 109.00. Well, the pair broke support, just as suggested last week, and touched its lowest point since the spring of 2005 (see figure 3).
Figure 3: USD JPY plunges to its lowest point since May of 2005. Source: Saxo Bank
At one point on Friday, the USD/JPY pair dipped below 107.60, then reversed thanks to a strong day for the U.S. equity markets. The Yen continues to perform well when stocks fall, and tends to give back ground when stocks rise. I'm still looking for support in the area just above 105.00, a major psychological barrier due to the Bank of Japan intervention of 2004. Keep an eye on Japan's CPI report, due on Thursday evening at 6:30 PM Eastern time, which is expected to once again show little or no inflation.
Chuck Norris-ism of the Week
Here we go again – this week's Chuck Norris-ism.
The tears of Chuck Norris would supply enough liquidity to solve the credit crisis. Too bad he never cries.
I Love New York! Pop quiz – which Online Trading Academy location was voted Franchise of the Year for 2007? Why, New York of course! John Bang, Tony Michaels, and the whole gang at Online Trading Academy New York would like to invite you to attend a free seminar and book-signing event with me on Wednesday January 9, 2008. Hey, what else would you expect from the Online Trading Academy's Franchise of the Year? Mark your calendars and don't miss this event - I can't wait to see all of my friends in the New York area!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through