[B]Talking Points
• Japanese Yen: 104.50 barriers erased as dollar strengthens across the board
• New Zealand Dollar: 7900 caps the rally
• Euro: Current account turns ugly dropping unit back through 1.5700
• Pound: Performs best against the buck refusing to buckle
• US Dollar: Durable Goods on tap[/B]
Another topsy turvy night of trade in the currency markets as EURUSD first rose nearly 100 points on the back of elevated inflation numbers only to give back all its gains as the region’s Current Account recorded its largest deficit in a decade. The euro initially rose to a high of 1.5761 in early Frankfurt trade as German inflation data and Import Price index all printed hotter than expected.
The rally however, quickly turned sour after news of a massive EZ Current Account deficit hit the screen. Current account deficit in the region increased to a whopping -15.3 Billion euros from a 7.5 Billion surplus the month prior. One of the biggest changes occurred in the inflow of goods component which went from a positive 4.5 Billion euros to negative 3.9 Billion euros. This is the third month out of the past four that the region has recorded a Current Account deficit rather than a surplus. The trend clearly shows that the region’s vaunted export engine which has been responsible for a string of current account surpluses for most of this decade, is starting to sputter badly. As EURUSD trades near record highs while global consumer demand cools due to soaring energy prices, EZ exporters will be facing a very challenging climate in months to come.
The euro, which has benefited mightily from the EZ superior balance sheet position vis a vis the US, may now become vulnerable to structural concerns. While the EZ Current Account deficit is still miniscule relative to US’s near $1 Trillion gap, the negative turn of trend in the EZ may temper speculative appetite for more euro longs at these levels. While EZ producers have done a Herculean job of maintaining demand for their goods at highly disadvantageous exchange rates, tonight’s news shows that they may reached the limit of their abilities and will likely suffer further decline in their business if the pair remains near record levels.
Attention in North American session will turn to US Durable Goods numbers which are expected to contract sharply form the month prior. The EURUSD may see a bounce if the data prints worse than expected, but given tonight’s woeful CA numbers the extent of the upside move will likely be limited. Furthermore, the true mover in the FX market may turn out to be the price of oil. If decline in crude prices accelerates, the greenback is likely to extend its rally, with traders betting on some relief for the beleaguered US consumer.
[B]EURUSD 1.60 or 1.50? Join us in EURUSD Forum[/B]
[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]