The U.S. trade gap widened to $60 billion from a revised $58.7 billion (initial $58.5 billion), in line with expectations. The widening in the trade deficit does not bode well for second quarter gross domestic product (GDP).
But weekly jobless claims continue to reflect labor market tightening, falling by 10,000 to 308,000 while the four-week moving average fell to 317,000.
An upward revision in Euro zone first quarter GDP growth to 0.7% q/q and 3.1% y/y from initial forecasts of 0.6% and 3.0% as well as increasing remarks from Euro zone politicians supporting the strengthening currency is driving the euro to fresh all time highs against the dollar at 1.3797 and nearing record highs vs. the yen.
Kuwait’s decision to revalue the dinar for the second time this year is the latest sign of countries having to counter the inflationary effect of tying their currency to the U.S. dollar, which is at three-year lows in trade weighted terms (all-time low vs. the euro, 26-year low vs. sterling, 30-year lows vs. the CAD and 18-year low vs. Aussie). More importantly, since Kuwait’s imports from the Euro zone account for a large portion of its overall trade, the record-breaking euro is especially increasing imported inflation of the Gulf nation. The news explains Kuwait’s decision last month to break away from its dollar peg and move towards a basket of currencies. The implications of the falling dollar on the inflation climate of the Gulf nations is likely to cause at least one or two Arab Gulf nations to follow Kuwait’s actions in breaking from the USD peg.
Gold eyes $680
We extend our bullish case for gold as expectations for a medium term Fed hike next year are gradually being replaced by a rate cut as the negative impact of subprime fallout weighs on U.S. bonds and overall risk appetite. We expect gold’s momentum to carry it towards $680 per ounce by mid August, as the stochastics display a bullish formation similar to the bullish patterns seen in past turnarounds in the charts below.
The Bank of Japan decided to leave rates unchanged at 0.5% in an 8-1 vote in what seemed to be a dovish make up considering increased expectations of a rate hike next month. The Upper House elections due later this month help explain the decision to keep interest rates away from the political debate. The second quarter GDP and CPI data due in mid August will also give policy makers the opportunity to sift through the reports before changing interest rates. Considering the recent yen gains, the Bank of Japan faces the challenge of not speeding up the currency’s recent appreciation without provoking renewed yen weakness when delaying a rate hike.
The charts below show that the yen’s strength is at its most notable since the rally of four month ago. The technical pattern seen in both the USD/JPY and the S&P 500 echoes a bearish MACD convergence at its early stages, suggesting 119.50 to be called up by mid August. On a more short-term basis, interim resistance is being lifted towards 122.70, but the overall tone remains predominantly negative. As we have seen yesterday, the lack of key U.S. data and a rebound in U.S. equities served as a catalyst for a corrective move in the yen’s decline. But with the effect of subprime developments likely to stay and risk appetite showing tendency for rapid erosion, the key target stands at 121.50 and 120.75.
EUR/USD retreats off its all time highs of $1.3798 to 1.3760s, which is seen as profit-taking that could reach to as low as 1.3725. Friday’s U.S. retail sales may trigger fresh highs beyond the $1.3800 and onto 1.3825-30 in the event that we do get the expected 0.2% decline.
EUR/GBP makes its way to session highs at 0.6780, supporting our bullish case for the pair on the grounds of continued ECB tightening versus a dubious future for the tightening BoE campaign. Target stands at 0.6795.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
