Finotec News Archive - August 22 2007

Main News: Is The Dollar Rally Done?

The US stock market and carry trades took a beating this week. The US dollar on the other completely reversed its downtrend and came close to erasing all of its year to date losses against some of the majors. Central banks have pumped over $350 bil

Buki Ben Natan
22 August 2007

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Along with the cut, they issued a statement that was far more dovish than the one released at the August 7 FOMC meeting. This sent three messages to the market. The first is that the liquidity injections have not been enough. The second is that the sub prime, credit and liquidity debacle is indeed hitting the “real economy” .The interest curve is now pricing in 75 basis points of easing by the end of the year. In response to the discount rate cut, the dollar has given back its gains, carry trades have rebounded and the Dow ended the day in positive territory.
The economic calendar is relatively light with only leading indicators, durable goods and new home sales due for release.

The probability of an ECB rate cut has dropped from 90 percent two weeks ago to 25 percent today. Many banks have shifted their outlook and are now not calling for a September rate increase. Today, ECB member Weber said that the central bank will do all that they can to ensure price stability and when asked whether the central bank still plans on raising interest rates or use strong vigilance on price risks, he declined to comment. This definitely suggests that the central bank could cancel its plans to raise rates next month.

Economic data is showing signs of slowing alongside inflation. This morning’s German producer price data reflected a 0.1 percent monthly drop in July. ECB President Trichet has not shown any signs that he too is reconsidering the central bank’s earlier plans to cut rates. We will be watching his commentary closely in the next few weeks. Meanwhile, even though the German ZEW report is due for release next week along with GDP and Eurozone PMI, the data should take a backseat to the movements in the equity and bond markets.

The Japanese Yen Crosses recovered most of their earlier losses after the Federal Reserve lowered the discount rate. At one point, all of the crosses were in the green for the day when the Dow opened up over 300 points. The Nikkei took a heavy beating last night with the index down 5.4 percent, which was the largest drop in 7 years. The announcement by the Fed today should help to stabilize some of the Asian markets. At this point, there is zero chance that the Bank of Japan will be raising interest rates next week.

Finotec Analysis Team
22 August 2007

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Today's Economic Events

Time	Event	Currency	Period	Previous	Forecast	Significance	Actual
14:30	crude oil inventories	USD	Weekly	-5.2mln	-2.8mln		1.9mln
crude oil inventories The Energy Information Administration's (EIA) Crude Oil Inventories measures the weekly increase in barrels of commercial crude oil held in inventory by US firms. The level of inventories influences the price of petroleum products, which can have an impact on inflation and other economic forces.
10:00	CBI Industrial Trends Orders	GBP	Aug	-6.0	-3.0		9.0
CBI Industrial Trends Orders The Confederation of British Industry (CBI) Industrial Trends Orders measures the value of new purchase orders placed with domestic manufacturers. A rising trend has a positive effect on the nation\'s currency. A busy manufacturing industry is a positive sign that the economy is expanding, and this survey points to how busy manufacturers will be in the months to come as they work to fill new orders.
09:00	Industrial New Orders m/m	EUR	Jun	1.7%	1.9%		4.4%
Industrial New Orders m/m Measures the value of new purchase orders placed with domestic manufacturers for durable and non-durable goods.
08:00	Current Account	EUR	Jun	-8.6bln	-2.0bln		5.9bln
Current Account Measures the quarterly difference in value between imported and exported goods, services, income flows, and unilateral transfers. A rising trend has a positive effect on the nation's currency. The Current Account is a comprehensive accounting of the nation's trade with other countries. It includes the previously reported Trade Balance (which covers trade of goods and services), so traders focus on the income flows and unilateral transfer portions of the report.