The U.S. trade deficit fell to $57.6 billion in August from $59.0 billion in July as imports fell 0.4% and exports rose 0.4%. The notable part of the report is that the 0.4% decline in imports (largest in six months) took place despite a 7% increase in petroleum imports (largest in five months), thereby reflecting a prolonged decline in demand and the overall slowdown in the U.S. economy. Anecdotal reports of falling shipments of industrial supplies, auto parts and furniture, reflect not only slowing retail demand but also the retreat in manufacturing. The 0.4% rise in exports reflect the advantages of a weak U.S. dollar and the relative strength in overseas demand.
Also stabilizing the U.S. dollar is the unexpected decline in weekly jobless claims by 12,000 to 308,000, which helps stabilize worries on the jobs front.
The British Pound extends its decline against most currencies on mounting evidence of slowing UK housing and services sector, raising chances that the highest interest rate in the G7 cannot be sustained at its current levels. The pound is increasingly losing favor against AUD (10-year lows), NZD (two-month lows), EUR (recently at 34-month lows), CAD (18-moth lows) and CHF, while its gains versus the dollar and yen are proving increasingly fleeting. More on the pound sterling below.
Meanwhile, the high yielding Aussie and Kiwi flex their muscles as the Aussie soared to fresh 23-year highs after the unemployment rate dropped to a 33-year low, raising chances that the hefty 7.25% interest rate will be raised further.
Gold prices hit a fresh 27-year high of $748 per ounce as the broad dollar selling and rising risk appetite boosts demand for the metal.
Euro regains $1.42 as buying remains path of least resistance The euro regained the $1.42 level as rising risk appetite and continued European Central Bank (ECB) hawkishness maintained the upward tempo on the single currency at the expense of the greenback. Euro zone second quarter gross domestic product (GDP) growth was confirmed at 0.3% q/q and 2.5% y/y. ECB’s Trichet reiterated his agreement with dollar strength being in the U.S. interest and the generic remark that excessive FX volatility is undesirable. Note that as long as Trichet avoids mentioning the euro in his currency-related pronouncements, the gains in the single currency should remain unabated, especially when price pressures remain emphasized.
Foreign central bank buying stands as a major force in boosting the euro, as buying on the dips remains the preferred strategy by real “money players”. Whether EUR/USD drops below 1.40 or not, the medium-long term trend is emboldened by the onset of falling USD-EUR yield and growth differentials. Upside starts at 1.4235, followed by 1.4260. Support stands at $1.4180, backed by 1.4165.
USD/JPY targets 118.00 Continued carry trade yen selling is likely to extend USD/JPY towards the 117.85 resistance, which is the 50% retracement of the decline from the 124.21 high to the 111.63 low. The Bank of Japan voted 8-1 for the fourth-straight time to keep rates on hold, while the conference from BoJ governor Fukui gave no signals indicating a rate hike before year-end. A break of 117.85, could extend to 118.20 especially in the event of seeing more than a 0.2% rise in U.S. retail sale tomorrow. Support climbs to 117.20 backed by 117.00.
Sterling hit by slowing housing, Northern Rock news Currently hitting the wires are reports that the Bank of England will lend additional funds to troubled mortgage lender Northern Rock. The reports trigger further declines in the pound as traders fret on the extent of the troubles with the lending institution. The main force behind sterling’s losses was the overnight release of the Royal Institution of Chartered Surveyors’ September report showing UK house prices fell at their fastest pace in two years as rising interest rates and broadening economic dampened new demand for homes. The average rate on two-year fixed mortgages surged to a seven-year high of 6.58 percent in August, while mortgage approvals fell to a four-month low.
Separately, the UK BCC Q3 survey shows evidence of slowing activity despite prolonged upward prices pressures. The index on the services sector fell from +36 to +29, which is a notable development considering services make up 3/4 of total GDP.
Our sterling bearishness is reiterated against AUD (0.45), NZD (0.3820) and CAD (1.98). Cable eyes $2.0320, followed by $2.0280. Upside capped at 2.0380.
Canada’s trade surplus rises despite CAD
Canada ’s August trade balance rose to $4.1 billion from $3.7 billion, while Canada ’s housing price index slowed to 0.4% from 0.6%. The rise in the surplus is a major positive for the currency considering the 14% rise in the loonie vs. the USD year to date. Rising oil exports have played a major roles in expanding Canada’s merchandise surplus, while offsetting any potential loss in manufacturing. USD/CAD eyes 97.50, followed by 97.20, but the better than expected U.S. trade figures should help stabilize declines in the pair. Risk aversion could prop the pair towards 98¢ and 98.30¢.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
