NEWS / Foreign Exchange

Weekly Forex Column

Market Directions April 9 ?– 13, 2007

The Week in Review

The balance of forces arrayed against the US Dollar this week overwhelmed the recent positive economic news from the American Economy. The apparent delay of the next European Central Bank (ECB) 0.25% rate hike until June and last Friday?’s much better than predicted Non Farm Payrolls (NFP) did little to dampen market enthusiasm for all things Euro. European markets did not react to the NFP results until Tuesday as both Friday and Monday were holidays in New Zealand, Australia, Hong Kong, France, Germany and the United Kingdom but they bought Euro and Euro/Yen unreservedly.

As expected the European Central (ECB) let rates remain at 3.75% on Thursday. Jean Claude Trichet the president of the central bank, did not however, use the occasion to initiate expectation of a 0.25% hike at the first May meeting of the ECB Governing Council. In his prepared statement the ECB chief said that the bank is ?“closely monitoring?” the situation and the markets have taken this to mean that an increase is coming in June but not May. In the past the ECB has employed the locutions ?‘vigilance?’ or ?‘strong vigilance?’ in the prepared statement to indicate a rate increase at the next month?’s meeting. The ECB has an unofficial policy, or guideline, that rate policy changes should take place at the first of the Governing councils two monthly meetings. It is not a rule, but it has been followed by Mr. Trichet. Recent ECB rhetoric has consistently warned against the danger of underestimating inflation. European economic growth estimates for 2007 and 2008 as compiled by the IMF are now equal or slightly ahead of those for the United States. The hawkish voices from the governing council have been more frequent and more specific in their inflationary concerns than the occasional dove. European economic statistics continued strong this week and it is unlikely that any statistical release over the next five weeks will change the council?’s collective mind.

The Dollar was also damaged by the US China trade spat which has been referred by the US to the World Trade Organization (WTO). Chinese products have helped restrain inflation in the US and China is a heavy investor in American government debt. Any disruption in the smooth flow of this important trading and financial relationship weighs heavily on the Dollar. And there is always the possibility of politically motivated protectionist trade legislation in Congress, primarily in the Senate. Senator Charles Schumer from New York has said he will introduce a China Trade and FX bill in Congress this session. In the past Mr. Schumer has been critical of Chinese ?‘currency manipulation?’. The same countries that are our largest trade creditors and the putative object of protectionist trade legislation are also our most generous financial creditors. China and Japan recycle a great portion of the value of their trade surplus to the US in the form of American government debt and investment in the private sector.

The Iranian announcement that they have begun large scale uranium enrichment with its potential for rising oil prices and conflict in the Persian Gulf was another factor plaguing the Dollar. The ease with which Iran manipulated oil prices and Western Governments with the kidnapping of the British sailors underlined the extreme vulnerability of the industrial economies to energy price turmoil.

Anton Boerner the head of a German export and wholesalers association representing over 135,000 firms said that his organization expects currency markets to test 1.4000 in the Euro and his members are not overly concerned about the record level of Euro/Yen. He also stated that ECB rates of 4.5% would drive up the Euro, an assertion not interesting for its analysis but for its inclusion in a public statement that German manufacturers can cope with a higher Euro.

The Group of Seven (G7) meeting this weekend in Washington is not expected to produce any currency comments. European officials have been notably silent in the run up to the meeting. This is in stark contract to the last G-7 conclave when both French and German officials attempted to pressure the conferees into including currency rates, particularly the ?‘undervalued?’ Chinese Yuan and Japanese Yen, in the discussions. A year ago this month just such a G-7 closing communiqu?© precipitated a violent month long fall in the Dollar. The potential for market disruption in wake of this conference of central bank heads and finance ministers is notable though rare.

Economic Releases April 9 - 13

United States

The FOMC minutes released on Wednesday were the major event in a barren week. Though they repeated the Fed?’s concern about inflation and tight labor markets they did nothing to convince traders that the central bank is any closer to slipping off the rate fence. On Friday the University of Michigan Consumer Sentiment numbers for April arrived a bit worse than expected at 85.3, 87.5 had been forecast; March had been 88.4. The biggest decline, 4.4 points, was in the expectations segment the reading most sensitive to rising gasoline prices. The International Trade Balance was also released on Friday, at -$58.4 billion it was slightly less than the predicted -$60.3 billion.

Eurozone

Wholesale prices for March rose 0.5% bringing the year on year average to 3.1% up 0.15 from February.

Germany

Revised GDP number for the 4th quarter were unchanged at +0.9%. Industrial Production figures for February were substantially better than anticipated, +0.6% month to month and +4.1% yearly; +0.2% and +4.0% had been expected. January numbers were -0.2% and +3.7% respectively.

Japan

February core machinery orders issued on Tuesday were weak, -5.2%, predictions had been for gain of 0.1%.

China

Export growth in March, 6.9%, was considerably below expectation, 27.4% and also less than the results for February, 51.7%, and January, 22%. Imports grew 14.5% in March, 20% had been forecast; February saw a 13.1% increase and January 27.5%. The Chinese have said that reducing trade imbalances is a primary goal in 2007. Though trade numbers are volatile, the reductions may be evidence that the government?’s measures, i.e. removing tax rebates for exports, are having some effect.