Euro Trades Heavy as Euro-Zone Deficit Widens, Will Risk Winds Dictate Dollar's Direction?

The Euro fell below 1.3420 on the news that the region’s trade deficit widened more than expected to -9.3 billion in August from -2.0 billion the month prior. Exports fell to 117.2 billion from 146.6 billion as global demand has plunged, signaling that a global recession may already be underway.

Talking Points
• Japanese Yen: Services Fell As Consumer Spending Slowed
• Pound: Bounces From Support at 1.7250
• Euro: Euro-Zone Deficit Widens
• US Dollar: Housing and Consumer Confidence on Tap

Euro Trades Heavy as Euro-Zone Deficit Widens, Will Risk Winds Dictate Dollar’s Direction?

The Euro fell below 1.3420 on the news that the region’s trade deficit widened more than expected to -9.3 billion in August from -2.0 billion the month prior. Exports fell to 117.2 billion from 146.6 billion as global demand has plunged, signaling that a global recession may already be underway. Despite the news the Euro was relatively quiet compared to recent trading sessions, as the hysteria generated by the credit crisis has started to dissipate which could lead to fundamental data having more of an impact on price action going forward.

The Tertiary index in Japan fell to 1.4% from 0.9% as consumers have curbed spending in the wake of the current financial crisis. As the evidence mounts that a global recession is underway, the calls for another coordinated rate cut are growing. Indeed, the Credit Suisse overnight index swaps are calling for another 132 bps of cuts from the ECB. Troubles in the Euro-Zone continue to spread as Hungary and the Ukraine are experiencing liquidity issues and have approached international institutions for help.

The Pound saw whipsaw action throughout the overnight sessions, as it fell to 1.7250 before bouncing higher. The initial weakness was driven by the declining interest rate expectations as the BoE is expected to cut rates t their next policy meeting. Credit Suisse overnight index swaps are calling for another 137 bps in rate cuts and expectations are increasing that we may see the central bank have to lower rates to as low as %1.00. Considering that the U.K. has lagged the U.S. since the beginning of the subprime crisis, the BoE may have to follow the Fed’s course of monetary policy and embark on an extended easing policy.

The U.S. economic calendar will prevent event risk in the form of housing starts and consumer confidence. The root of the current credit crisis is the ongoing housing slump and the expectations that housing starts fell to 875,000 from 895,000, which would be the lowest reading since 1991. Meanwhile, economists are predicting the University of Michigan consumer confidence metric for October fell to 65.0 from 70.3 as the current credit crisis has weighed on sentiment. Americans outlook had grown more optimistic the past three months on easing oil prices and the perception that the financial problems were dissipating. The heighten levels of the crisis and the current pessimistic outlook for the economy may lead to consumers curbing their spending going forward which will extend the current economic downturn. The dour fundamental data may weigh on the dollar. However, if the news sparks risk aversion we may see flows seek the safe haven of the greenback and extend its recent gains.

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