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Thursday October 14, 2004 - 21:17:47 GMT -

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Forex Points: Euro Tests Top Of Range As US Trade Deficit Widens To $54 Billion

DailyFX Forex Fundamentals 10-14-04

· Euro Tests Top Of Range As US Trade Deficit Widens To $54 Billion
· Pound Gains Limited On a Weaker BCC Economic Survey
· Yen - Oil Relationship Breaks Down


The price action in the euro was very interesting today as the pair skyrocketed on the much weaker than expected US trade deficit, only to quickly retrace its gains over the next hour and then rebound back towards session highs. The US trade deficit increased from a revised -$50.5 billion to -$54 billion. This compares to the record high of -$55 billion that was recorded this past June. The market had forecasted a shortfall of approximately -$51.4 billion, which would have only amounted to a modest widening. However, soaring oil prices pushed the cost of imported fuel higher. Exports remained generally unchanged increasing 0.1% m/m while imports increased 2.5% m/m. The crude oil balance increased by 11.3%. We have repeatedly warned that the risk for the trade balance was clearly for a larger widening, so today’s release should not catch our readers by surprise. The deficit has been growing for some time now and isn’t an immediate concern as long as foreigners are willing to fund the deficit. We will see if this is the case on Monday, when the Treasury releases its International Capital flow data. Of more immediate importance though will be tomorrow’s advance retail sales report. The deficit is an age-old concern. Instead, the sustainability of consumer spending is more important for the near term. This explains the euro’s inability to break beyond the 1.2450 range high despite today’s sharply weaker number. If tomorrow’s retail sales report disappoints, we could see the previous 1.2450 high taken out relatively easily.


The dollar was actually dealt a triple blow today with the wider trade balance, higher jobless claims report and weaker import price index. The trade deficit increased by 6.9% as the gap with China widened to another record high (see euro commentary for more details). Jobless claims jumped unexpectedly in the week ending October 9th. The Labor Department attributed these losses to corporate layoffs ahead of third quarter earnings reports. This is particularly concerning following last Friday’s shockingly weak non-farm payrolls report. The outlook for the labor market remains equally dismal with already announced layoffs from big corporations such as AT&T and Bank of America. The weakness in the labor market could resonate in tomorrow’s retail sales data. Although advance retail sales and ex-autos are predicted to be higher, the risk is once again for a much weaker report. In what could be taken as a leading indicator for the report, Jones Apparel Group just released an exceptionally weak earnings pre-announcement. They lowered fourth quarter earnings from a range of $0.56 and $0.59 to between $0.40 and $0.45. They attributed the weakness to deteriorating consumer confidence, employment and hurricanes.


Unlike the euro, gains in the pound have been limited following the rather disappointing BCC quarterly economic survey. The BCC is the largest independent business survey in the UK. The report highlighted weakness in both the manufacturing and service sectors and the survey indicated that the business climate is becoming more difficult and a few key areas have worsened. More specifically they said, “We have a major concern that business confidence is falling in the service sector which has a vital role to play in sustaining economic activity and job creation. Manufacturing performance is just about adequate, but given the recent poor official figures, the sector is also facing some very serious risks and challenges. We believe that the weakness in some economic indicators means that the threat of further interest rates rises should now be lifted. BCC has consistently supported a cautious stance on interest rates and one should not rule out the possibility that interest rates are at their peak.” The BCC is only the latest to join the chorus in predicting that the BoE is at the end of their tightening cycle.


The yen strengthened modestly despite a weaker consumer confidence report and another record high in oil prices. As we have previously mentioned, the yen and oil relationship has broken down over the past few days. With the financial markets jittery about the sustainability of the global economic recovery, consumer confidence deteriorated in the month of September. Meanwhile the corporate goods price index increased 0.1%, which is the 9th consecutive month of price gains. This firmness in prices is slightly encouraging for monetary policy, but the BoJ will most likely continue to remain patient with policy changes.


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