The market had already shown its desire to sell dollars when economic data has come across the wires worse than expected as well as when it comes in line. Now, after a considerable improvement in the current account balance, traders have shown they are willing to unload the worlds most liquid currency even when the news is good.
From price action, the majors made considerable intraday breaks against the greenback. After leveling off on a 1.3180 low for the previous 24 hours, EURUSD rallied to test the previous swing high with a temporary top around 1.3045. The USDCHF showed a modest dollar bid in the European hours, but this turned into a 100-point drop that pulled the pair through 1.2140 support to a more secure floor seen at 1.21. Volatility returned to GBPUSD when a 35-point consolidation band above 1.9220 turned into a 150 point rally to 1.9370. Finally, the Japanese yen was having difficulty capitalizing on the fresh dollar drop after USDJPY turned on 115.75 before picking up 100-points on a retracement.
Though price action hardly reflected it, the economic calendar was, on balance, supporting the dollar bulls. The biggest single piece of data to hit the wires Wednesday morning in the New York session was the Commerce Departments measurement of the fourth quarter current account balance. Before the release, the trade imbalance was already a hot button issue. Now, with the final quarterly number in place and the indicator reporting a fresh record deficit for the year, politicians and policy makers have the numbers needed to rejuvenate their discontent in Washington DC and at trade summits with China. On the other hand, though the $856.7 billion shortfall for the year marks a discouraging trend, the quarterly change spurred speculation that the bottom has come and gone with a much better than expected number. According to the governments number, the deficit shrank from $229.4 billion in the three months through September to $195.8 billion the slightest shortfall since the third quarter of 2005. Further diving into the component data, the goods and services, income and unilateral transfer balances all improved. The most influential change though came from the physical trade group, which improved $33.6 billion with the help of cheaper energy imports.
Elsewhere, the import price index provoked mixed sentiment among trades. On the one hand, the inflation gauge reported heightened pressures over Januarys numbers. On the other, the pickup was less than what the market had expected. Getting a true sense of the numbers, the 0.2 percent pickup on the monthly measurement and the acceleration to a 1.3 percent pace year-over-year are still well off the numbers seen only six months ago. Back when the Federal Reserve was still hiking borrowing rates, the annual import price gauge always held above a 4 percent gait and had frequently topped twice that. Therefore, comparing these two, very different periods shows why so many economists believe it there is little chance the central bank will consider further tightening any time this year. Ultimately, however, the import index does not have the final say in the world of economic indicators on policy decisions the consumer price gauge due on Friday has that distinct honor. Tomorrow, traders will absorb the factory inflation numbers to establish their final consensus for the end of the week CPI read.
Over in the stock market, fears that the weakness in the depressed mortgage sector is contagious led the benchmark indices to extend yesterdays sharp declines. By 15:45 GMT, the Dow was trading 0.17 percent lower at 12,054.89. At the same time, the NASDAQ Composite was flat at 2,350.56 while the S&P 500 was working on marginal gains to 1,378.27. In the wake of yesterdays performance (where 97 percent of the stocks comprising the S&P 500 were in the red), a few outliers continued to push the markets around. From the hard hit financial sector, Lehman Brothers shares slipped 3.2 percent or $2.30 to $69.70 after printing in-line earnings numbers. In a filing of its own, auto-maker GM reported a fourth quarter profit achieved by cutting back labor costs. However, traders were more sensitive to the fact that GMs numbers missed the markets consensus, and they in turn pushed the stock 0.7 percent lower to $30.30.
In the morning hours of trade, treasuries were put on hold by the mixed picture built between the improvement in the trade account and the drop in imported inflation. By 15:45 GMT, the ten-year note was unchanged at 101-02 while its yield hovered at 4.491. Bonds were quoted only slightly lower after slipping 2/32nds to 101-14 as its yield remained anchored to a 4.66 rate.