Trade or Fade for the Dollar

Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

·          JPY Machine Orders skyrocket

·          <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK Trade Balance deteriorates

·          German exports and Industrial Production grow

·          All eyes on US Trade Balance deficit

If yesterday was rate announcement day in FX, todays theme is trade. Overnight both UK and German Trade Balances reported results, with UK figures showing surprising deterioration. The UK Trade Balance with non EU members expanded to -3.3B versus expectations of -2.8 Billion pounds. Surprisingly, trade in crude registered  the biggest surplus since last March,  with the increase in the trade deficit coming strictly from an ever widening gap between imports and exports for consumer goods and services.  The news does not bode well for cable as the widening  trade deficit will now weigh on UK growth going forward. The only positive dynamic for pound longs remains UK capital markets which continue to attract massive amount of M&A flow  and have been the dominant driver of pound demand over the past several months.

German data was considerably better with Trade Balance printing at 11.2 Billion surplus- slightly lower than the 12.3 Billion forecast. Exports however far outpaced imports jumping 4.3% against a rise in imports of 2.3%. Yesterday, much to the chagrin of euro longs,  ECB President Jean Paul Trichet masterfully orchestrated a lowering of the EUR/USD  exchange rate by essentially promising nothing ex-ante to the markets leading many speculators to doubt ECBs commitment to further rate hikes.  We, however, believe the European monetary officials have lost none of their hawkish resolve,  and having  guided the EUR/USD to well below the 1.3000 level will now be free to exercise proper monetary restraint without the interference of EZ fiscal officials concerned about the threat to export growth.

Imports and exports will of course be fresh on the minds of traders today as the US Trade Balance deficit is due to report at 12:30 GMT today. The currency market consensus is for a widening of the gap to -$65 Billion. Although hardly positive, should the number meet expectations, it is unlikely to produce a major negative impact on the greenback. Only if it nears the psychologically troubling -$70 Billion level could the  dollar feel pressure as all of the structural concerns about the deteriorating US Balance Sheet position return to the forefront.  Of special interest will be the composition of the Trade Deficit itself. Namely, market players will want to know if the petroleum deficit expanded materially from the month prior.  Should that be the case it may add an additional negative note to the tone of the report, since the primary exporters of crude from the Gulf region have been far more enthusiastic buyers of euros than the goods producing exporters such as China and Japan.

FX Upcoming
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