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Tuesday March 14, 2006 - 21:00:30 GMT

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Forex: Record Setting Deficit Sends Dollar Tumbling Ahead of TIC Report

DailyFX Fundamentals 03-14-06

By Kathy Lien, Chief Strategist of

• Record Setting Deficit Sends Dollar Tumbling Ahead of TIC Report
• Surprising Drop in ZEW Limits Euro’s Rise
• Yen Soars on Stronger Industrial Production Report

US Dollar

Yesterday’s slide in the dollar deepened significantly today with the Euro breaking the psychologically important 1.20 level and USD/JPY falling far below 118.00. Disappointments in retail sales and the current account brought back concerns for the US’ structural deficiencies. Joining the ranks of the trade deficit and the budget deficit last week, the current account hit a record high of $224.9 billion in the fourth quarter or what is equivalent to 7 percent of GDP. Such high benchmarks have the market extremely jittery going into Wednesday’s net foreign purchases announcement. According to Bloomberg, the forecast is for net foreign purchases to have increased by $62.4 billion in January, which is slightly less than the same month’s trade deficit of $68.5 billion. Should we really print a number that is smaller than the January deficit, we could see another strong wave of dollar weakness. As we mentioned last Friday, this week is all about trade and sizing up the US’ ability to attract foreign investors. In contrast, with the market already so bearish dollars going into the report, a number higher than $69 billion could be just what the market needs to turn the latest correction in the dollar into nothing more than a mere stall within a broader uptrend. Meanwhile consumer spending in the month of February fell a more than expected 1.3 percent. At first glance, this may seem like a pretty dismal report, but it is important to mention that the weakness in sales was predominantly due to a sharp fall in auto sales since purchases less autos actually came in better than expected. Additionally, sales in January were revised higher by more than the downward surprise seen in February’s release. However the weakness of auto sales should be reflective of the fate that other interest rate sensitive big ticket items may soon face as well.


Euro traders were in for a big surprise this morning when the German ZEW survey of analyst sentiment took a surprise dive from 69.8 to 63.4 in the month of March. Given the recent trend of positive economic data, analysts were predicting for the ZEW to rise to 71.0. However according to the ZEW institute, although domestic demand is expected to continue to benefit from strong corporate performance, “the increasingly restrictive monetary policy around the world might dampen the global economic situation and negatively affect German exports.” This fear is quite valid given Germany’s sensitivity to global growth. Should the rest of the world really slow significantly, German exports would be the first to suffer. In addition to the ZEW, consumer prices were also released out of France today which was right in line with expectations. Separately, the Bank of France reported that the outlook for activity remains favorable and suggests that economic growth accelerated in the first quarter. Overall, the weakness of the ZEW survey has helped the British pound outperform the Euro in the face of broad dollar weakness. Tomorrow’s Eurozone economic calendar is light, which means that there is little to distract EUR/USD traders from the day’s main focus, which will on the US Treasury’s net foreign purchases report.

British Pound

The lightness of today’s UK economic calendar was probably a blessing for the British pound, which outperformed against the Euro after the weak ZEW report. However tomorrow should be different with the Eurozone having a light calendar while the UK awaits its unemployment data. Judging from the forecasts, the market is expecting another mixed report with both claimant count and average earnings ticking higher. Meanwhile mergers and acquisitions in the UK continue to hit the headlines. Yesterday, Barclay’s bank signed an agreement to sell its stake in First Caribbean International Bank to Canada’s CIBC for USD $1.1 billion. Today, Kesa rejected a bid from a private equity group that valued the company at USD $3 billion. With deals popping up on a near daily basis, the British pound has the luxury of benefiting from demand driven by something other than economic growth.

Japanese Yen

USD/JPY was the biggest mover today in the currency market, falling 1.1 percent in the past 24 hours. After six days of consecutive gains, the dollar rally faced exhaustion and was prime for a correction. However, the correction over the past two days has been extremely brutal due to the combination of dollar bearishness and Yen bullishness. Industrial production rose 0.4 percent in January, marking the sixth consecutive month of increasing activity. This supports the overall argument that things are getting better in the Land of the Rising Sun. Given that the minutes from the last two monetary policy meetings revealed little details on when interest rates would be increased, more attention will be paid to the Bank of Japan Governor Fukui’s speech on Thursday at 07:00 GMT. Meanwhile, comments from Treasury Undersecretary Tim Adams also helped to push the Yen higher. Bloomberg reports that he warned Japan against artificially preventing the Yen from rising. With the relatively lofty levels of USD/JPY, there have been no immediate signs of possible intervention by the central bank.


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