The U.S. trade deficit rose to $63.1 billion in November from $57.8 billion, overshooting estimates of $59.7 billion, as imports rose $6.0 billion due to a $4.8 billion jump in oil prices. Exports rose by a more modest $0.6 billion. The widening trade gap increases the probability of sending Q4 gross domestic product (GDP) growth into negative territory, especially if we get further widening in the December figure.
Risk appetite trades in FX are under pressure after the Thursday Wall Street rally proves unsustainable following losses throughout Asia and Europe. Reports of a $15 billion in write downs from Merrill Lynch and new warnings from UBS are just among the factors offsetting the cheery news of BoA’s announcement to acquire Countrywide Financial, and Federal Reserve Chairman Ben S. Bernanke’s signaling of further easing to come. Aside from the short-term psychological effect of the Countrywide announcement, we’re unsure how the news is positive for the broader equity indices when the acquisition means that United States’ biggest retail bank will inherit a yet undetermined amount of defaulted mortgages as well as dangerous load of legal troubles. In other news, the major credit card companies are reporting rising write-offs because of increasing delinquencies, with American Express said announcing a Q4 charge of $275 million to cover rising customer defaults
With the 10-/two-year yield spread soaring to a three-year high at 120 basis points following Bernanke’s speech, the steepening of the yield curve means that the U.S. Fed funds rate may be cut by as much as 175-bps from its current 4.25%. We had originally been expecting 100-bps in Fed cuts for the year, but the resulting developments in the U.S. yield curve following Bernanke’s overture to further easing are rising the probability of seeing interest rates dropping to as low as 2.75%. .
Yen rises as Asia, Europe shuns Wall Street rally
The fact that neither Asian nor European markets were encouraged by Thursday’s Bernanke/Countrywide-driven rally in Wall Street prompted traders to take money off the yen shorts. We have long stated that the weakness of U.S. equity indices has been highlighted by the nature of the factors that make up periodic gains. Factors driving up equities have been limited to news of capital injections (from SWFs or local players) and Fed easing.
These infrequent bouts of buying in equities are increasingly proving buying opportunities in the Japanese currency. USD/JPY eyes support at 108.50, followed by 107.80. Upside seen limited at 109.70.
More sterling losses
Fresh declines in the beleaguered British pound come amid renewed signs that UK manufacturing is in recession after manufacturing output and production both fell 0.1% in November, undershooting expectations of a 0.1% and 0.4% rise. Last week, the CIPS survey on manufacturing showed new orders to have tumbled to 21-month low in December. These reports confirm that yesterday’s BoE rate decision was no more than a delay, maintaining our expectations for 100-bps in rate cuts for the year.
We stick with our short term target for GBP/USD eyeing $1.9450, which would especially be the case in the event of better than expected U.S. trade data. Interim support stands at 1.9525. Upside capped at 1.9630.
Loonie downed by jobs data
After yesterday’s 9.9% collapse in Canadian building permits, today’s release of the December jobs showed a net decline of 187,000 following a 426,000 increase, versus expectations of a 15,000 increase. The unemployment rate remained unchanged at 5.9%. Loonie is dragged across the board, and will likely add to these losses as stocks re-enter negative territory. The major developments in the currency are CAD/JPY projecting 106.40 and 105.80, AUD/CAD eyeing 0.9170 and 0.9220. USD/CAD eyes further gains at 1.0230, followed by the double top resistance at 1.0250. Support stands at 1.0150, backed by 1.0115.
Euro set to shed Trichet’s gains
Euro is propped by the worse than expected rise in U.S. trade deficit figures, eyeing the 1.48 figure, with gains seen extending to as high as 1.4830. The pair was especially boosted by an especially hawkish ECB press conference yesterday. Losses are expected to be limited at 1.4755, with downside risks calling for 1.4730. Upside capped at 1.4820.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
