Talking Points
AUD jobs much better than expected
JPY Current Account +20% on weaker yen
EU inflation declines markedly
US Trade awaited
As Kathy noted yesterday, Although near term fundamentals call for more dollar strength than weakness, the potential of the EUR/USD hitting a bottom is growing by the day. The currency has now sold off for seven consecutive days, which is the longest stretch of weakness since June when it also faced seven days of continuous losses. Aside from that time, there has only been one instance over the past seven years that the EUR/USD has sold off for more than seven days, which was back in August of 2003. After a wild New York afternoon which saw a series of overreactions first to the presumably hawkish FOMC notes and then to the airplane crash on the Upper East Side of New York, the euro recovered all of its losses and presently trades back at same levels as Wednesday morning.
The message from the FOMC notes suggests that the Fed continues to focus primarily on inflation and is therefore unlikely to lower interest rates in the near future. The currency market which had been anticipating some loosening by the start of next year, sold EUR/USD in reaction to the news. But traders may have jumped the gun in making those assumptions. Global inflationary pressures as evidenced by the latest UK figures and tonights EU numbers are in fact receding rapidly. The Fed may in fact be fighting the last war. With massive deflationary pressure from the US housing market and only mediocre wage growth consumer spending rather than inflation may be the true problem. The sharp decline in gasoline prices has been a tremendous boost for the US consumer but it remains to be seen if it can spur growth this month. Thats why Fridays Advance Retail Sales may well be the most important release of the week providing the market with a good preview of the consumer mindset as we head into the crucial Christmas shopping season.
Meantime in overnight news, UK RICS house survey hit a four year high at +45 providing strong support to cable bulls looking for a rate hike from the BOE in November and GBP/USD rallied 70 points as a result. The EUR/USD shook off lower than expected German HICP readings which grew only 1.0% y/y as the pair bounced from oversold levels. With ECB focusing far more on controlling liquidity than just price levels in EU its tightening program is unlikely to terminate any time soon even if inflation remains below the central banks 2% target. Today also brings the US Trade Balance data which is expected to contract but as we noted in our weekly, According to latest data from Long Beach and Los Angeles ports, imports have increased at a whopping 16% rate versus past levels of 12% suggesting the trade gap may hit another record unless lower oil prices offset some of that growth.
