[B]Talking Points
• New Zealand Dollar: Worse than expected Trade Balance weighs on the unit
• Japanese Yen: Back above 109.00 as equities stabilize
• Euro: PPI in line consumer confidence deteriorates
• British Pound: Probes new 5 month lows before bouncing
• US Dollar: Fed Speak on tap only[/B]
Less than 24 market hours after the horrid US NFP number and it is as though the event never happened as the dollar regained all of it post news losses trading back to 1.4670 against the euro in morning European session. A large part of the greenback’s strength stems from pure risk aversion as the sharp drop in equities on Friday forced carry trade unwind in many of the high yield crosses such as EURJPY, GBPJPY and AUDJPY. However with European bourses having stabilized this morning the buck remains relatively buoyant. Why?
One possible explanation is that the currency market is becoming increasingly more skeptical of the decoupling thesis. Namely, many traders anticipate that the slowdown in US economy will inevitably drag down growth in the rest of the world necessitating monetary easing across the globe. Nowhere has this dynamic been more evident than in the GBPUSD which has been especially weak against the dollar recently hitting 5 month lows earlier in Asian trade today. Market participants, viewing the UK economy as a miniature version of the US economy, are becoming convinced that the BoE will be forced to lower rates another 25bp at this Thursday’s MPC meeting, With high levels of consumer debt, a cooling housing market and near total reliance for growth on the financial sector, the similarities certainly abound. However, the UK data so far remains surprisingly strong suggesting that economic demand remains relatively healthy. Should BoE choose to hold off easing for another month cable could well see a relief rally on the news.
Meanwhile, the euro has lost much of its upward momentum over the past several weeks as it consolidates above the 1.4500 level. ECB hawkish rhetoric notwithstanding few traders believe Mr. Trichet and company will actually raise rates in Q1 of 2008 given the deterioration in consumer confidence in the region. Today’s survey showed a further decline to –9 from –8 expected and demonstrates that despite the improving labor market and relatively sound production gauges, the credit crunch is beginning to weigh on European economy as well. Still, trade in the EURUSD will be driven by US economic events. As we noted in our weekly “If US labor environment begins to deteriorate the Fed will be forced to ease unremittingly at least through the summer, doing further damage to the greenback as interest rate differential with the euro continues to compress.”
If you would like to discuss this article with other traders or Senior Strategist Boris Schlossberg, please visit the DailyFX Forum.
