Pound weakens as trade deficit widens

• July 11, 2006
• Kathy Lien

Talking Points

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AUD housing market continues to boom but business sentiment cools

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JPY Consumer Confidence declines on Nikkei pullback

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UK Visible Trade Balance deficit shocks to the downside

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BOC rate announcement key North American event

Pound bulls were in for a nasty surprise this morning when UK Visible Trade Balance reported a much larger than expected deficit of -6.75 Billion pounds versus consensus calls of -5.7 Billion. Higher oil prices and continued decline of competitiveness in UK’s industrial sector produced the second largest deficit on record. The news does not bode well for cable longs still hoping for an end of the year rate hike from the BOE as the deteriorating trade position of the UK economy will depress the country’s GDP growth going forward and will likely keep the Central Bank on the sidelines for the rest of the year. After rallying to 1.8450 sterling dropped
bellow the 1.8400 level in the aftermath of the announcement while the EUR/GBP cross bounced off .6900 support to challenge yesterday’s highs. As we noted in our weekly piece, “with the BOE standing still while the rest of the majors central banks are aggressively hiking the pound continues to be the weakest member of the pack.”

Meanwhile markets in Asia and Europe were
essentially static as the absence of any meaningful economic news and the traditional start of the summer vacation season have started to slow order flow. The euro traded range bound between 1.2700-1.2750. German wholesale prices rose 0.5% continuing to demonstrate inflationary pressures in Euro-zone’s largest economy while Italian Industrial output recovered smartly rising 2.9% from a decline of -2.8% the month prior. In Japan, Consumer Confidence dropped to 47.3 from 49.8 on what several analysts interpreted as a reaction to the falling Nikkei. The numbers helped to push USD/JPY back above the 114.00 level with pair trading as high as 114.40 as some traders are now positioning for the sell the news trade with respect to the much anticipated removal of ZIRP at this Friday’s BOJ Monetary policy committee meeting. The thinking amongst yen bears is that even if rates are lifted from zero, BOJ will be extremely cautious in hiking them much beyond the 25bp level for the rest of 2006 in light of the softening Japanese consumer sentiment.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
CAD	12:15	8:15	Housing Starts (JUN)	220.0K	218.4K
CAD	12:30	8:30	New Housing Price Index (MoM) (MAY)	0.5%	1.2%
CAD	13:00	9:00	Bank of Canada Rate Decision	4.25%	4.25%
USD	21:00	17:00	ABC Consumer Confidence	—	-9

Currency	GMT	Release	Actual	EST	Previous	Comments
NZD	22:00	NZIER Business Opinion Survey (2Q)	-44		-49	Improved despite 7.25% rates
AUD	1:30	Home Loans (MAY)	4.7%	0.8%	0.1%	A massive surge in home loans failed to boost conf.
AUD	1:30	National Australia Bank’s Business Survey (JUN)	9		9
AUD	1:30	Investment Lending (MAY)	4.9%	—	-1.9%
JPY	5:00	Consumer Confidence (JUN)	47.3	48.0	49.9	Stock market decline weighs.
JPY	5:00	Consumer Confidence Households (JUN)	47.2	49.1	49.8
EUR	6:00	German Wholesale Price Index (MoM) (JUN)	0.5%	0.2%	0.7%	Wholesale prices continue to increase after May’s six-year high in price increase.
EUR	6:00	German Wholesale Price Index (YoY) (JUN)	5.3%	4.9%	5.0%
EUR	6:45	French Costs of Construction (1Q)	1362	—	1332
EUR	6:45