Forex News Week 50-2

FX Quiet by Korman Tam

The dollar remained soft against the majors in early Tuesday trading following yesterday’s remarks from former Fed Chairman Greenspan, in which he warned of further dollar weakness in years to come. The greenback drifted lower, albeit confined within narrow arranges during Tokyo given the barrage of economic events due out later in the session – slipping to 1.3266 against the euro and 1.9623 versus the sterling. Also worth pointing out is the sharp ascent in recent sessions of the yen crosses -- as the carry trades have regained favor amid lingering uncertainty over the BoJ’s tightening campaign.

The main event for currency traders will be the FOMC’s monetary policy announcement at 2:15 PM New York time. While the Fed is not expected to change rates from 5.25%, the subsequent policy statement is seen to maintain a hawkish bias against inflationary pressure. Further, it is plausible that the Fed will focus particularly on recent improvements in both labor conditions and the services sector, thereby reinforcing the outlook for a soft landing in the economy. It is also likely that Fed Chairman Bernanke will sound off a more hawkish tone -- raising concerns about further risks to inflation as a result of tightening labor markets, in an effort to temper growing market expectations of an impending rate cut as early as Q1 2007. Nonetheless, we continue to anticipate the next move by the Fed to be a shift in stance to monetary easing with inflation concerns diminishing and stimulating growth becoming the primary focus.

The US October trade deficit will be released at 8:30 AM and is forecasted to shrink to $63.0 bln, versus $64.3 bln in the previous month. Former Fed Chairman Greenspan anticipates more years of dollar weakness unless there are significant changes to current trade imbalances. Helping to alleviate the US’ burgeoning trade deficit has been the gradual decline in oil prices since peaking in the summer -- coinciding with the record deficit of $69.0, thereby reducing imports.

Euro Edges Higher Ahead of ZEW

Markets will closely scrutinize Germany’s December ZEW consumer sentiment, due out at 5:00 AM New York time. Although the economic sentiment is forecasted to improve only slightly to -25.0 from -28.5 a month earlier, given the Ifo’s recent unexpected rise to a 15-year high, the ZEW stands to also exceed forecasts. Recall in late November, the euro rallied sharply following the release of the Ifo. The euro stands to benefit from further upbeat reports, which would further highlight the divergence between the economies of the US and Eurozone.

Korman