The US trade deficit rebounded to $61.2bn in December, from $58.1bn, thanks to a surge in imports of oil, motor vehicles and clothing. The modest rebound in crude oil prices in the final weeks of last year caused the petroleum-related deficit to increase by $1.9bn, accounting for roughly two-thirds of the overall deterioration. In contrast, the Euro-zone economy grew at a better-than-expected 0.9% in the 4Q, strengthening expectations that the European Central Bank will raise interest rates next month. US Treasury Secretary Henry Paulson repeated on Tuesday that China needs to speed up progress toward allowing its Yuan currency to trade more freely.
News and Events:
The Dollar slipped across the board on Tuesday, pressured by data showing wider-than-expected US Trade Deficit in December, while strong Euro-zone economic growth data buoyed the Euro. The US trade deficit rebounded to $61.2bn in December, from $58.1bn, thanks to a surge in imports of oil, motor vehicles and clothing. The modest rebound in crude oil prices in the final weeks of last year caused the petroleum-related deficit to increase by $1.9bn, accounting for roughly two-thirds of the overall deterioration. Otherwise, non-petroleum imports increased by 1.6% led by a 7.2% rise in automotive and a 7.9% rise in clothing. The politically sensitive bilateral deficit with China shrank to $19.0bn, from $22.9bn.
In contrast, the Euro gained support from data showing that the Euro-zone economy grew at a better-than-expected 0.9% in the 4Q, strengthening expectations that the European Central Bank will raise interest rates next month. The Yen was again weaker across the board after a meeting of the Group of Seven industrial nations ended without a formal alarm about Yen weakness. With interest rates at 0.25%, the Yen has suffered as investors keep borrowing it to invest in higher-yielding currencies.
Investors are looking ahead of Federal Reserve Chairman Ben Bernanke�s delivery of semiannual testimony to congressional committees on Wednesday and Thursday. Analysts said if Bernanke reiterates the concerns of other Fed officials who said last week inflation was still above their comfort zone, the Dollar could return in a positive tone. Since August, the Fed has held the Benchmark Fed Funds rate steady at 5.25% after raising interest rates 17 times from June 2004 to June 2006. Most analysts expect the Central Bank to start cutting interest rates this year. But given sighs the Fed is still concerned about inflation; few now expect a rate cut in the first half of 2007.
US Treasury Secretary Henry Paulson repeated on Tuesday that China needs to speed up progress toward allowing its Yuan currency to trade more freely.
Today’s Key Issues:
Euro European Central Bank�s Quaden presents annual report
JPN 4:30 GMT: December Industrial Production 0.7% (MoM).
GB 9:30 GMT: December Average Earnings inc. Bonus expected 4.1% unchanged. Janunary Claimant Unemployment rate expected 3%, December ILO unemployment rate (3months) expected 5.5%.
US 12:00 GMT: MBA Mortgage Applications previously -0.2%
US 13:30 GMT: January Retail Sales expected 0.3% vs 0.9% and Less Autos 0.3% vs 1%.
US 15:00 GMT: Fed�s Bernanke testifies before Senate on Monetary Policy.
US 15:00 GMT: December Business Inventories expected 0.3% vs 0.4%
JPN 23:50 GMT: 4Q Gross Domestic Product expected 0.9% vs 0.2% (QoQ) and 3.6% to 3.8% vs 0.8% (YoY).
The Risk Today:
EurUsd remains in the 1.2865 to 1.3075 trading range for a month now. A break out of this range is required to define the next likely directional move. An upside break would expose 1.3130 (61.8% retracement of the 1.3298-1.2865 decline). Failure to stage a successful assault on 1.3075 would re-focus attention on last week’s 1.2900 low and then 1.2866 key level.
GbpUsd maintains a bearish bias following the sell-off over the past few days. On the Upside, we would need a recovery beyond Friday’s 1.9604 high to relieve pressure on 1.9416 (76.4% retracement of the 1.9260-1.9920 advance) and get us closer to 1.9750 resistance (61.8% retracement of the 1.9917-1.9482 decline), where a break is required confirm the return of the bull trend. Further weakness would open 1.9260.
UsdJpy yesterday’s sell-off does highlight the possibility of a near-term reversal, weakness below Friday’s 121 low would be necessary to threaten the broader advance. Key resistance and the next upside trigger is 122.20 and 122.40 (61.8% retracement of the 135.18 to 101.67 decline). A break of the latter would unlock 123.25.
UsdChf maintains a bull tone above 1.2376 support; with the focus on 1.2575, the range top from end January. A successful assault on this level would reinforce the bull trend and initiate further upside to 1.2770, high from October. On the downside, a break of 1.2376 is required to undermine the bull trend and also signal a reversal with target at 1.2309 (38.2% retracement of 1.1881-1.2574 advance).
Resistance and Support: