Key News

• Economists rushed on Wednesday to predict a UK interest rate cut next week, as a survey of manufacturers was more pessimistic about the sector’s output than at any time since the last British recession in the early 1990s. (FT)
• European manufacturing contracted more than initially estimated and unemployment rose to the highest in a year as the deepening credit crisis slowed growth.

US Economic Events (WSJ):
8:15a.m. Sep ADP Employment Report: Expected: -53K. Previous: -84K.
10:00a.m. Aug Construction Spending: Expected: -0.5%. Previous: -0.6.
10:00a.m. Sep ISM Manufacturing Business Index: Expected: 49.5. Previous: 49.9.

Quotable
“Many momentous historical developments occur without the participants fully realizing what is happening.”
                                                George Soros

FX Trading – Strong dollar simple logic we think!
We are guessing the “momentous historical development” that launches the US dollar into a new multi-year bull trend was the credit crunch.  It is a game changer on risk appetite and correlation of every asset class (but the dollar) going up at the same time, as the dollar credit was the driver.  We have marked the Credit Crunch on our long-term dollar – gold chart

Simple logic or are we all wet?  Don’t answer that!

• Strong dollar soothes system-wide credit concerns (it’s still the world’s money)

• Strong dollar makes oil cheaper (less dollar borrowing by countries to buy oil)

• Strong dollar mollifies commodities prices and inflation expectations (allows for rate relief needed in Asia and Europe)

• Strong dollar helps US consumption (imported goods cheaper i.e. increases purchasing power)

• Strong dollar helps periphery exports (liquidity draining from emerging markets, exports required to re-liquefy)

• Strong dollar helps German exports (and European manufacturing)Strong dollar combined with rising US yield differential (as ECB and BOE and RBA and SNB…cut rates) might create a self-reinforcing flow of hot money (speculative capital) into the US looking for a home, thus reducing the burden of fiscal policy to stimulate the private sector

If this logic is correct, then these are our guesses:

• European currencies continue to head much further south

• Commodity dollars sag

• Crude prices are pressured lower for a time

• Gold is finished in this cycle

• Spreads and interbank tension start to normalize

• Stocks—we don’t even wish to venture a guess

• World—it does not end. Congress—If wishing could make it so; but it can’t.  Stuck with them we are.