â€¢ Japanese Yen: LEI lowest in 3 years but yen boosted by weak equities
â€¢ Pound: Liquidation continues as 2.04 gives way
â€¢ Euro: EZ Trade Balance remains strong despite high exchange rates
â€¢ US Dollar: TICs and Industrial Production on tap
A very quiet night to the end weekâ€™s trade, as EURUSD essentially bounced around the 1.4600 level in whippy price action driven mainly by equity flows. The one piece of economic data proved positive for the EZ as Trade Balance registered a better than expected surplus of 3.1 Billion euros with Germany the leader in exports.
For the time being it appears that the European industrial sector is able to absorb the high exchange rate differential and maintain its competitiveness. However, as weâ€™ve been stating for weeks, the pressure on EZ producers is becoming apparent in the most recent manufacturing surveys and will likely result in a material slowdown in demand if the pair continues its relentless march upward.
Furthermore, the regionâ€™s trade deficit with China is becoming progressively unbalanced widening to 70 Billion euros this year. According to Bloomberg, an EU delegation led by ECB President Trichet is expected to tell the Chinese authorities at the end of the month that risk of a protectionist measure would increase markedly if China does not revalue the yuan. In short, despite the relatively robust EZ economic environment, EZ monetary policy makers face tremendous political pressure to not exacerbate the current exchanger rate situation by raising rates further. Given that dynamic the currency market may begin to downgrade the prospect of any additional rate hikes from the ECB in Q1 of 2008.
The euro, however, may strengthen irrespective of the interest rate considerations if the balance sheet position of the US economy continues to deteriorate. Up until very recently US was able to attract enough foreign capital to offset its massive trade deficits, but last months TICs data shattered the complacency of the market when it printed at -69 Billion versus forecasts of 65 Billion surplus. If foreign capital flows are indeed drying up the long term structural implications for the greenback are very negative. Todayâ€™s announcement by UAE that it is considering a replacement of the dollar peg with a broad currency basket could only be that start of a massive move away from the dollar as the reserve currency of the world. On the other hand if the TICS data today returns to its normal $60 Billion monthly rate, those concerns will be set aside for the moment and trading should continue in its range bound fashion for the rest of the day governed primarily by equity flows.