NEWS / Foreign Debt

Forex Market Update - US Trade Deficit Hits a Record High

Published: Sep. 12 2006, 13:37 GMT

US Trade Deficit Hits a Record High

...but USD holds gains.

MAJOR HEADLINES ??“ PREVIOUS SESSION
??? UK CPI (Aug) mom 0.4% vs. 0.3% exp., yoy 2.5% vs. 2.4% exp.
??? UK UK Core CPI (Aug) 1.1% vs. 1.1% exp,
??? UK RPI (Aug) mom 0.4% vs 0.3% exp., yoy 3.4% vs. 3.4% exp.
??? US Trade Balance (Jul) -$68.0 vs. -$65.5 exp.
??? CA Int'l Merchandise Trade (Jul) C$3.9 vs C$4.9 exp.
??? CA New Housing Price (Jul) mom 1.1% vs. 1.0% exp.

FROM THE MORNING UPDATE
??? French Industrial and Manufacturing Production disappointing.
??? Norwegian CPI Underlying MoM (Aug) out at -0.4% vs. 0.0% expected.
??? UK PPI figures all lower than expected.
??? UK Visible Trade Balance (Jul) out at -??6338 vs. -??6200 expected.
??? Feds Minehan suggests growth will slow to below 3 percent and that energy prices might feed through to core inflation.
??? NZ 4Q Manpower Employment Outlook improving to 26% from 19% in 3Q.
??? Canadian Housing Starts (Aug) out at 213.7K vs. 229.0K expected.
??? Canadian Capacity Utilization (2Q) out at 85.5% vs. 85.3% expected.
??? AU 4Q Manpower Employment Outlook improving to 27% from 15% in 3Q.
??? JP 4Q Manpower Employment Outlook unchanged at 24% from 3Q.
??? GY 4Q Employment Outlook improving to 5% from 1% in 3Q.
??? FR 4Q Employment Outlook unchanged at 4% from 3Q.
??? UK 4Q Employment Outlook deteriorating to 9% from 12% in 3Q.
??? Japanese Domestic CGPI MoM (Aug) out at 0.2% as expected.
??? Japanese Consumer Confidence (Aug) out at 47.8 vs. 49.0 expected.
??? Japanese Consumer Confidence Households (Aug) out at 47.6 vs. 48.6 previously
??? Fed Poole says US economic growth still 'robust'

THEMES TO WATCH ??“ UPCOMING SESSION
??? UK Leading Indicator Index
??? Fed Yellen Speaks
??? NZ Retail Sales
??? JN Consumer Confidence, Trade Balance, Tokyo Condo Sales, Industrial Production, Capacity Utilization.

NZD
Tonight's retail sales will be very important for the NZD. A weak figure could trigger a significant selloff. With no support coming from the RBNZ....watchout.

USD
The greenback held to earlier gains despite weaker then expected Trade Balance figures. Printing at -$68.00b above the 65.5 expected figure positioned the US trade deficit at new record level. However, the USD bulls were not to be denied as the EURUSD unexpectedly broke the psychological 1.2700 lvl and pushed USDJPY towards 118.00 lvls. With a thin calendar before the 14th, watch the USD trade within the ranges with a bullish bias. Thursdays Advance Retails Sales and Fridays CPI will show if this USD rally is for real.

CAD
Canada printed mixed data with housing prices firmer but critical trade surplus falling to $C3.9b. Trading was choppy as the USDCAD jumped from 1.1180 to 1.1220 before settling on a downward move towards 1.1180 resistances (bottom of three day range). With a light calendar before the 19th CADs fate will be defined by USD action. Failure to break support in the near term will have the USDCAD continued in its bullish channel.

JPY
Japan will be releasing a wealth of data between NY and the close of Asia trading. Recent economic indicators have pointed to a very weak Japanese economy and the JPY has paid the price. Trader will be focused on Industrial production, Current Account and release of the BoJ Monetary Policy meetings minutes. Market sentiment is clearly bearish on the JPY and traders will be searching of any weakness. Should these figures disappoint look for the GBPJPY and EURJPY to get the biggest upside bounce.

FROM THE MORNING UPDATE
JPY
Consumer confidence fell unexpectedly to 47.8 vs. 49.0 forecasted. These figures continued a significant downside trend in Japan??™s economic indicators. Just this week we have seen GDP print lower to 1.0% and Machine Orders fall off the map. We believe the only salvation Yen Bulls have will be found at the G-7 in Singapore, where Europe??™s policy makers will put pressure on Japan to strengthen its currency. Remember Japan has been keeping the JPY weak through an indirect low interest rate monetary policy and any additional rate increase would cause appreciation. Until then we see the JPY continue to look weak against the majors.

After a day of positioning the FX market will be focused on today??™s economic releases.

UK
The UK CPI will be the first economic indicator on the docket. After a surprise rate hike, the BoE toned down their hawkish rhetoric in August as inflation levels ease off slightly. The current expectation is for a single increase in November. Should the reading ease slightly we could see GBP weakness as the Nov. hike comes off the table. On the reverse, should inflation increase traders will rush to price in the additional rate hike.

USD
Well once again its time to see how far the US can go into debt with Trade Deficit (Jul) expected at 65.5b. While the market is relatively numb to the massive figures each month there is some event risk built into this reading. First the market has become aware, once again, of structural imbalances seen in the price action of the NZD and ZAR. Second this July reading encompasses oil at the $77 lvls, which could create a significant surprise to the upside. However, since this market has yet to decide on a direction (EURUSD still in a 1.25-1.28 range) and the USD feeling strong a figure in line or below could see the USD rally.

CAD
After taking a beating in recent sessions, Canada looks very bearish going into Europe. After a rash of disappointing reading (Capacity Utilization the exception) this week alone, a decline in New Housing prices or more importantly Intl Merchandise Trade would see USDCAD test 1.1243 lvl. We see CAD as perhaps the weakest currency today.

Note: the support/resistance levels used in the matrix??™s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar
EURUSD (1.2714 @ 13:31 GMT)
EURUSD range bound with a bearish bias in Monday's trading, but still able make a higher low, which suggest the pair squeezing higher in early Europe. Look for renewed selling interest in the 1.2755-75 area, bear trend line from Sep. 5 and 50% retracement (from 1.2872-1.2650) for a test of the 1.2680-00 base. Or wait for a break of 1.2650 which would give scope for a 1.2560 target further out.

Resist.
1.2880
1.2788
1.2745
1.2714
1.2654
1.2605
1.2514
Support

Quoted:
12 Sep 06
13:31 GMT


British Pound/US Dollar
GBPUSD (1.8758 @ 13:31 GMT)
GBPUSD finding a bottom early in the week above 1.8600, but remains heavy. Sell rallies as long as 1.7810 resistance remain intact. A break above to target a short term corrective recovery for a test of 1.8780-90 where new solid selling interest should be found. We still favor placing orders to sell just below 1.8600 for a 1.8525 target.

Resist.
1.8864
1.8760
1.8707
1.8758
1.8603
1.8550
1.8446
Support

Quoted:
12 Sep 06
13:31 GMT

US Dollar/Japanese Yen
USDJPY (117.67 @ 13:31 GMT)
USDJPY traded through 117.40 key resistance which gives scope for further upside in the week to come. Today look to buy downticks towards 116.80-117.05 support stop below 116.65 for a 118.00 intra-day target. On a longer term basis USDJPY still need to close above the bear trend line from 1990 presently at 118.70 to give longer term upside acceleration.

Resist.
119.69
118.52
118.10
117.67
116.93
116.19
115.02
Support

Quoted:
12 Sep 06
13:31 GMT

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