Good or bad for the Forex? I have no Idea

Thursday, August 6, 2009

Continuing my thoughts from yesterday, on Wednesday the US reported a third straight month of Factory Order increase, a sign that things are picking up in the manufacturing sector.

The report was met with mixed results as the Dollar fell and stocks ended slightly off, an unusual occurrence as normally when stocks are down the Dollar is up as Forex Traders usually seek a safe haven respite.

I was watching Fox Business Network and they had an economist on who was analyzing the data and came up with similar conclusions to what I had said yesterday, simply, the reports that are coming out are not reflective of “the whole picture”. So this is the story behind the factory orders data:

About three weeks ago, the US announced a program called “cash for clunkers” which gives people $4,500 for their junk cars towards the purchase of a new car with more than a minimum of 17 Miles Per Gallon.

This program is supposed to encourage “green” purchases to help lower overall carbon monoxide gases, as well as a boost to the ailing auto industry enabling them to see out their old 2008 models to allow for increased production of 2009 models.

The program was launched in “test” areas about two months ago, and was met with wild success and went national two weeks ago. It has been so popular in the two weeks since, that Congress is approving another 2 Billion Dollars towards extending it.

Old model cars are flying off the shelves and as a result, the auto factories that have been closed for the better part of the year are cranking out 2009 models to refill the auto lots.

In anticipation of this success, the government asked auto part makers, those that support car manufacturing by producing the “nuts and bolts” of the cars, literally and figuratively, to begin working again – and gave them about 10 Billion Dollars in incentives to do so – taxpayer money.

Aside from this, the government is not only giving those that trade in a car $4,500 on the clunkers, they also give the dealers about 15 Billion Dollars in loan guarantees, more taxpayer money, to help those that cannot afford a new car even with the $4,500 credit, finance the cars. The average car sells for $30,000 in the US.

So the result of this is you have people who cannot afford a new car, people who never would have thought of buying a new car, now buying new cars to the rate of about 450,000 new cars in the past two weeks.

And they are doing it for the most part, with their own present and future tax dollars. To me this is not stimulus but rather stupid.

The program is good, don’t get me wrong, it helps real people, dealers, manufacturers, factory workers, but it misleads the investor as if it were not for the mass injection of cash on every level of this venture, factory orders would be negative again.

What is a Forex trader to believe? This is a difficult call as the factories are working and they are cranking out new product, but it is the government that is financing all this using money that does not exist.

The US government will be in a 13 Trillion Dollar hole next year – 1 Trillion less than the 2007 GDP of the country. They owe China 3 Trillion, Russia 1 Trillion and are poised to pass legislation on healthcare that will send them even further in the red.

So, the factory orders are good for now, but at what cost to the value of the Dollar overall is this happening. I am not ashamed to admit that I am stumped here – I don’t know how this will play out as this is a new concept. This is not like the housing starts numbers which are skewed – real people are benefitting – but as Forex Traders how do you trade on this info?

My Forex Online friends, if you have an ideas, please leave me a comment – I am curious to know how the rest of the world views this dilemma. For now, I am sticking to the Aussie as always.


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