Daily Forex Trading Commentary: Largest US Trade Deficit Since March 2007

EURO

The euro came off vis-à-vis the U.S. dollar Thursday as the single currency tested bids around the US$ 1.3880 level and was capped around the $1.3995 level. The common currency reached its lowest level since 18 September as traders reduced exposure to currencies with positive interest rate differentials following Reserve Bank of New Zealand’s larger-than-expected rate cut overnight. Data released in the U.S. Thursday saw the July trade balance balloon to US$ 62.2 billion, the largest deficit since March 2007. This was much worse-than-expected and it remains to be seen if the U.S. imported enough investment capital in July to cover its massive current account and trade deficits that month. Traders are closely watching the shares of U.S. investment banking giant Lehman Brothers. After trading above $17 on Monday, the shares are now trading below $5.00 and traders are waiting to see if the financial institution will be taken over or bailed out by federal regulators. Other data released in the U.S. saw August import prices off a record 3.7% m/m and up 16% y/y with food prices up 15.9% y/y, the largest rate since at least September 1977. Additionally, weekly initial jobless claims fell 6,000 to 445,000 while continuing jobless claims jumped 122,000 to 3.525 million, the highest level since October 2003.

In eurozone news, European Central Bank member Noyer said eurozone banks “remain robust and well equipped to withstand shocks.” ECB member Papademos hawkishly reported “There are indications that broad based second-round effects are materializing, and it is essential that broader-based second-round effects are avoided.” Similarly, ECB’s Mersch reported “The recent fall in oil prices does not rule out that the pressures from past rises could still unleash a ‘wage-price’ spiral which would harm jobs and competitiveness.” Germany’s IfW institute reduced its 2008 German GDP growth forecast to 1.9%. Euro bids are cited around the US$ 1.3840 level.

JPN/CNY

The yen appreciated vis-à-vis the U.S. dollar as the greenback tested bids around the ¥106.20 level and was capped around the ¥107.85 level. Stops were reached below the ¥106.60 level, representing the 38.2% retracement of the move from ¥124.15 to ¥95.70. The yen gained ground across the board after Reserve Bank of New Zealand reduced interest rates by a larger-than-expected 50bps to 7.50%, defying expectations of a 25bps reduction. RBNZ’s move caused some short yen carry trades to be unwound as yield differentials between Japanese interest rates and overseas interest rates narrowed. Data released in Japan overnight saw July core private-sector machinery orders fall 3.9% m/m, the latest evidence that manufacturers are trimming their capital expenditures budgets. The Nikkei 225 stock index lost 1.98% to close at ¥12,102.50. U.S. dollar bids are cited around the ¥102.45 level.

The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥147.50 level and was capped around the ¥150.75 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥185.95 and ¥93.05 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8465 in the over-the-counter market, up from CNY 6.8385.

STERLING

The British pound moved lower vis-à-vis the U.S. dollar as cable tested bids around the US$ 1.7440 level and was capped around the $1.7590 level. Technically, Thursday’s intraday low was right around the 50% retracement of the move from $1.3680 to $2.1160. Bank of England Governor King called on the government to keep fiscal spending in line after Chancellor of the Exchequer Darling said there is scope for the government to increase spending. Sterling moved lower after BoE Monetary Policy Committee member Blanchflower said he anticipates multiple months of 60,000-plus increases in unemployment and a deepening of the U.K.’s economic pullback. BoE also released its quarterly public inflation expectations survey and the public’s inflation expectations over the next twelve months increased to 4.4% from 4.3% in May. BoE will release more details to provide additional liquidity next week. Cable bids are cited around the $1.6540 level.

The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.7920 level and was capped around the ₤0.7995 level.

SWISS

The Swiss franc depreciated vis-à-vis the U.S. dollar as the greenback tested offers around the CHF 1.1415 level and was supported around the CHF 1.1335 level. Swiss National Bank is expected to keep interest rates unchanged next week. U.S. dollar offers are cited around the CHF 1.1390 level. The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5840 and CHF 1.9885 levels, respectively.

Posted in Categories: Contributor, Economy, Eurozone, External Research, Forex, Japan, New Zealand, Switzerland, UK, USA.

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