Fed’s Fisher diagnoses the US Economy with anemia.

The US$ cooled after 5 straight positive sessions caused by fears that the gains would not be sustainable on the long run. The US$ gains seems to reflect the growing concern regarding poor worldwide economic growth rather than confidence in the performance of the US. This comes after UBS reported another 6B writedown, which so far have grown to $500Billion for the Financial Industry. The Fed’s Fisher has changed his usually hawkish rhetoric to diagnose the US Economy with anemia, and he expects the US Economy to “broach zero growth in the second half 2008”. The US$ did receive a shot of oxygen after the Trade numbers showed a less than expected deficit after a 4% gain in exports.

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in another ‘whippy’ tight trading range.

FX Heatmap August 12th, 2008

US Trade balance figures showed a reduction (-56.8B vs. -59.2B) beating expectations of a -60B deficit. Even after posting record Oil imports, US exports outpaced imports to finish with a 4.1% decrease of the Trade Deficit.

The US$ currently is higher against the EUR -0.05%, CHF -0.09% and lower against GBP 0.08% and JPY -0.16%. The commodity currencies are mixed this morning, CAD -0.17% and AUD -0.45%. The CAD got a boost from the Trade Balance numbers which showed a better than expected surplus of 5.8B vs. last period’s 5.2B. The US$ strength kept battering the loonie in the previous sessions. It was no surprise that the CAD got to recover after the US currency lost some of its newly found luster, and Canadian Trade Balance numbers helped the loonie break a losing streak where it had reached yearly lows.

The AUD continues to fall (0.8730) after investors continue to unwind their carry trades financed in JPY and the weakening commodities outlook. The interest differential was very attractive for investors. The Australian rate is 7.25% while the Japanese rate is 0.50%. The current economic climate down under has the traders betting that the RBA will cut rates to boost economic growth.

Crude is stronger O/N ($113.69 up 69c). Crude prices stopped their fall for the first time in 4 sessions. which touched 14 week lows after the USD lost most of its strength. Currently crude prices are been dictated by geo-political issues competing against global growth concerns. Oil analysts are concerned about a physical disruption to European supplies, next in Russia’s agenda might be US friendly Ukraine. If this occurs it will filter throughout the whole market and send the ‘black gold’ much higher. Last week’s EIA crude stocks rose +1.61m barrels to 296.9m, w/w, vs. an anticipated fall of -200k barrels. Demand numbers remain weak in the US due to elevated gas prices. Some investors are speculating that high prices and slower US economic growth will further reduce demand in the US in the medium term. Gold like most commodities recovered some ground ($825), after the the US$ strength vs. the EUR was reduced, this will increase demand for the yellow metal as an inflation hedge.

The Nikkei closed at 13,023 down -280. The DAX index in Europe was at 6,539 down -47; the FTSE (UK) currently is 5,496 down -38. The early call for the open of key US indices is lower. Yields of the US 10-year notes fell 1bp yesterday (3.91%) and another basis point O/N (3.90%). Investors have continue to seek refuge in the FI market. Future traders are pricing a 69% chance that the Fed will raise borrowing costs in January (2.00%)

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza