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US Trade Deficit Expected To Remain Near Record Levels

Daily Forex Fundamentals 07-12-04

By Kathy Lien, Chief Strategist of

· US Trade Deficit Expected To Remain Near Record Levels
· Japanese LDP Elections Fare Poorly, But As Expected
· UK PPI Increase Less Than Forecasted


The euro remains bid in a quiet trading session that lacks any notable US economic data. However, today’s price action is more likely the calm before the storm, albeit likely to be a weak summer storm, as we are expecting a number of important US economic data beginning tomorrow. Once again, we revert to the familiar period of where the direction of the EURUSD is dictated by the dollar component and not by the euro. We see evidence of this amidst mixed European economic data. Italian industrial production remained flat m/m, but a better than expected 2.7% y/y. This is quite promising since last month’s upwardly revised 0.6% m/m industrial production growth came on the heels of four consecutive quarters of flat to negative growth. French industrial production on the other hand increased a less than expected 0.2%. German CPI was revised lower to 1.7% from 2.0% yoy, which may relieve some of the ECB’s recent concerns about rising inflation. Tomorrow, we have minor French data. As in the rest of the world, French headline inflation is expected to decline on the back of lower oil prices in the month of June.


The dollar is stalling ahead of the release of tomorrow’s US trade deficit. In the last release for the month of April, the trade deficit widened to a new record high of $48.3 billion. The unexpected surge came on the back of strong domestic demand for foreign cars and consumer goods. According to the latest survey conducted on Friday by Bloomberg, economists expect the trade deficit to hold near its record highs. High oil prices likely pushed the costs of imported oil higher, but retail sales increased 1.2% in May, the same measurement period as the trade balance, which suggests that import demand remains healthy. Unless there is a sharp narrowing of the deficit or a significant increase in the demand for US exports, it is unlikely that tomorrow’s trade data will help to relieve some of the downward pressure on the US dollar. Aside from the trade and inflation data scheduled for release this week, close to 10% of the companies in the S&P 500 will be announcing earnings including big corporations such as Intel, Johnson & Johnson, Bank of America and Citigroup.


The British Pound extended its gains against the US dollar despite weaker producer price inflation reports. PPI output rose 0.1 per cent in June, less than the 0.2 per cent expected by the market. PPI Input fell 1.6 per cent on the month, largely due to the fall-off in oil prices. However, the price action in the pound is probably indicative of the market’s belief that the PPI report was unlikely to affect the Bank of England's decision on interest rates in August as oil prices have been on the increase again this month. Far more important will be Tuesday's consumer price inflation report, and the fact that ODPM statistics revealed that annualized UK house price inflation accelerated to 12.2% in May, from 10.0% in April. Gordon Brown, the Chancellor of the Exchequer announced that in the government's 2005-2007 spending plans, they anticipate an average departmental increase in spending of 4.2% on services by 2008. However, the increase in spending, also comes with more efficiency savings, which translates into more than 100,000 job cuts in civil services. The decision to cut jobs will be fiercely objected by unions, but Brown is under pressure to reduce spending to keep the Treasury’s budget deficit from bulging further. In April, the deficit increased to GBP37.5 billion, which is the largest since the Labour Party took power.


Dollar yen grinded to a low of 107.53 in Tokyo on Monday as traders became more confident that Japan will continue to push ahead with reform policies after the ruling Liberal Democratic Party lost fewer seats in Sunday's election than the market had originally expected. Although the main opposition Democratic Party of Japan won 50 seats, the LDP turned in a better showing than what the market had expected in light of opinion polls ahead of the election. The election outcome means the ruling coalition has kept its majority in the upper house. It also holds a majority in the more powerful House of Representatives, the lower house of Japan's parliament, which chooses the prime minister. The traders will focus next on results of a two-day meeting of the Bank of Japan's policy-setting committee that began on Monday - no change in policy is expected.

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