·
Euro (EUR) Traders Insecure Ahead of
ECB Rate Decision
·
US Dollar
(USD) Rallies After Stronger Trade
Balance
·
Canadian Dollar (CAD) Rises Despite 19 Month Low in Oil
Prices
US Dollar
The US dollar has rallied 400 pips
against the Euro in a little more than a week with the latest jump being driven
by the smaller than expected trade deficit. As we pointed out yesterday, the four
percent drop in the trade weighted dollar during the month of November has helped to deliver the third straight monthly improvement in the deficit by boosting
exports and restraining imports. The low level of oil prices has also kept the
value of crude imports virtually unchanged. Former Federal Reserve Chairman Alan
Greenspan has often said that one of the few ways to fix the trade deficit is
for the US dollar to weaken. Now
that it has weakened, we have seen its impact on trade and its potential
contribution to growth. As long as
the trade balance does not deteriorate much in the month of December, we could
see 3 percent GDP growth in the fourth quarter. The market is very bullish dollars now
after having recovered nearly all of its end of November gains, but we will need
to see a strong retail sales report on Friday before the EURUSD can retreat back
into its Summer of 2006 trading range.
Comments from Federal Reserve officials this afternoon were mixed, but
the takeaway message from Moskow and Fisher is that inflation is still a concern
and for the time being, there is a next to zero chance that the Federal Reserve
will be cutting interest rates in the near future. There is no significant data due for
release tomorrow but more Federal Reserve Presidents will be giving
speeches. The day’s key focus will
the European Central Bank meeting in the morning and then depending on how
Trichet sways, the market could settle down after the London close and tread
water before the US retail sales figure on Friday.
Euro
The long awaited European Central Bank interest rate decision is tomorrow
morning and the Euro is weak going into it, which means that should there be any
upside surprises, the EUR/USD has plenty of room to rise. The main question the market is
contemplating at the moment is not how much the ECB will move but whether ECB
President Trichet will stick to his hawkish stance since no rate changes are
expected. Recent economic data
suggests that even though growth in the Eurozone economy is improving, the
improvements have been limited to certain sectors. The drop in oil prices has also been
helping to lower inflationary pressures but at the same time, recent Euro
weakness is keeping it from falling too far. Trichet surprised the market in December
by remaining extremely vigilant and to date, we have not heard any differently
from other ECB officials. The ECB
is not a central bank that likes surprises which means that if they were to
change their stance, they would have most likely let the market know by
now. Therefore it is quite clear
why the market is so insecure going into this rate decision. Insecurity only means one thing in the
currency market and that is, volatility.
Meanwhile the Eurozone data released this morning was softer than
expected. Both French
industrial production and the French trade
balance deteriorated in the month of November
while the German wholesale price index remained flat in December.
British Pound
After two days of holding onto its
gains, the British pound finally succumbed to dollar strength. The currency buckled when consumer
confidence and the trade deficit both came out weaker than expected. Confidence dropped from 89 to 83 while
the trade deficit hit a 6 month low. The drop in confidence is actually quite
surprising given the potential strength of retail sales this holiday
season. Many individual retail chains
have reported very sharp increases in spending over the past few weeks while the
BRC reported an acceleration in prices.
Both of these developments are still relatively positive for the British
pound and should keep the central bank hawkish for the time being. Even though the trade data was
poor, most of the deterioration was related to the strength of the sterling and
should not impact the economy much since the UK is
dependent on export. Looking ahead,
we have industrial production and leading
indicators due
for release tomorrow morning.
Although the manufacturing sector contracted in October, a nice rebound
is expected for the month of November. The Bank of England
also has a scheduled interest rate announcement, but no changes are
expected.
Japanese Yen
The Japanese Yen rebounded today against every major
currency expect for the US and Canadian dollars. Speculation about interest rate
direction continues to drive currency movements, but for the time being, the
outlook remains very cloudy. The
war of words last night was between the head of research at the Bank of Japan
(Hayakawa) and ex-BoJ official Nakahara.
Hayakawa was relatively optimistic about growth, but Nakahara said that
it may be premature to raise interest rates this month.
Either way, we believe that even if the BoJ raises rates, it may not
necessarily be positive for the Yen.
Commodity Currencies (CAD, AUD, NZD)
Once
again, the Australian and
New
Zealand dollars are moving in lockstep while
the Canadian dollar performs differently.
Interestingly enough, the CAD is the only currency that is stronger
against the US dollar. In the face of falling oil prices, this
movement is primarily due to expectations for a rebound after crude hit 19 month
lows. As prices continue to drop,
the risk for major complaints from OPEC is growing. Canada also reported some firmer data
which includes an uptick in house prices, building permits and a stronger trade
surplus. Australia on the other hand reported
mixed data, which included a weaker trade surplus, stronger consumer confidence
and job vacancies. This suggests
that tonight’s employment data could be slightly firmer as well.
