Trade Data Returns to the Forefront

by Ezechiel Copic –
After having absorbed the most recent interest rate decisions, the focus of the market turns to the topic of trade with the US trade balance for May due out on Wednesday and the US Treasury’s TICS data due out July 18. With oil prices rising, there is a distinct possibility that the US trade deficit could exceed the $60 billion figure on its way to a new record high. This report will be especially important in light of the fact that for the past two months the TICS data has confirmed that net US-bound foreign capital inflows have failed to cover the monthly trade deficit.

This week also sees the release of industrial production data and retail sales figures, which should help to further clarify the situation among consumers and manufacturers. Industrial production for June is expected to duplicate May’s 0.4% increase and retail sales are projected to increase 0.9% after having declined by 0.5% in May. However, much of the increase in retail sales is expected to come from the recent action by auto dealers to aggressively discount cars. Therefore, the markets will be more focused on retail sales excluding automobiles, which are forecasted to increase 0.5%. Any softness in industrial production and retail sales, coupled with a burgeoning trade deficit could prove bearish for the greenback.
Inflation data in the form of CPI and PPI for the US are also due out at the end of the week, with the headline figures forecasted to increase 0.3% and 0.5% (M/M), respectively.
Speculators renew interest in greenback
Speculators continue to favor the commodity currencies of Australia and Canada against the US dollar as oil prices remain near record highs. The loonie has garnered the lion’s share of the attention with the amount of net long positions increasing by almost 80% to 4,088 contracts from 2,284 a week earlier. Friday’s employment figures highlighted the continuing strength of the Canadian economy as the unemployment level in Canada unexpectedly decreased to 6.7% from 6.8% – giving additional support to comments from Governor Dodge that an increase in interest rates is likely to come “over time.”
Although futures traders remain net long the aussie, the appeal of AUD is beginning to lose its luster as net long positions fell more than 60% to 8,570 contracts for the week ending July 5 due to overall short positions increasing more than four-fold. The recent increase in US interest rates by the Federal Reserve has narrowed the yield gap between the US and Australia to its smallest in almost four years, resulting in a decline of AUD as the destination currency for carry trades.
Against the euro, yen, sterling and Swiss franc, the dollar fared much better with net short positions increasing with the euro leading the pack as net short positions jumped up almost 75% to 24,872 contracts. The Fed’s decision to increase interest rates to 3.25% and, perhaps more importantly, signaling that this measured policy of tightening would continue stands in stark juxtaposition with that of the ECB, which is coming under strenuous pressure from European politicians to cut rates in order to ameliorate the current stagnation of the eurzone’s economy. For this reason, speculators were reluctant to be long the euro and thus decreased their position by 28%.
Even before the terrible bombings that occurred in London on Thursday, traders were resolutely bearish on sterling with net short positions increasing further to 20,414 contracts – the highest level since September 2003. Although the Bank of England decided to leave interest rates unchanged at 4.75%, it is widely believed that they will cut rates at their next meeting in August. As the market digests the recent terrorist attacks and prepares for a future rate cut, sterling bearishness should continue, and possibly strengthen.
Net short positions for the Japanese yen remained steady near their 5 year high with net short contracts increasing by a modest 1% to 52,186. However, as oil prices continue to surge this could spark an increase in the bearish sentiment that the market currently holds for the yen.
Swiss net shorts increased 2.5% last week to 45,540 contracts. Recent events in London, however, should see a decrease in net short positions next week as traders flocked to the safe haven of the Swiss franc following the terrorist bombings.
Aussie looks to commodities for support
Although the aussie improved Friday against the greenback, it was still down for the third week in a row as the narrowing yield gap between interest rates in the US and Australia caused many to favor USD. Support for aussie bulls, however, might be renewed on the strength of rising commodity prices. Crude oil prices continue to surge and Thursday’s terrorist bombings in London boosted the appeal for gold, with prices rising by as much as $5.60 after the attack.
Resistance for AUDUSD remains strong at 74.70 and 75.50. Meanwhile, support is seen holding at 73.58 followed by the trend line support of 72.60.
Yen weakness continues
With oil prices remaining near record highs and continued expectations of further interest rate hikes by the Federal Reserve, the USADJPY has been pushed higher – currently trading near its highest level since May 2004 at 112.10-20. Once a resistance level, 112 is now acting as a support level for USDJPY. Additional support seen at 111.80 and 111.60. Resistance for the pair has increased to 112.40, followed by 113.33.
Source: Forex News