Dollar weakens broadly after widening of U.S. trade deficit triggered long liquidation: Oct 7, 2015

Market Review - 06/10/2015 22:46GMT 
 
Dollar weakens broadly after widening of U.S. trade deficit triggered long liquidation

U.S. dollar weakened further against the other major currencies on Tuesday, as wider-than-expected U.S. trade deficit in August illustrated the U.S. economy's vulnerabilities to a strong dollar and weak demand in foreign markets, which could impose further caution on the Federal Reserve's plans to hike interest rates.

The Commerce Department showed that the U.S. trade deficit widened to $48.33 billion in August from $41.81 billion in July, whose figure was revised from a previously estimated deficit of $41.90 billion. Market had expected the trade deficit to widen to $47.40 billion in August. Separately, overall exports fell 2% to their lowest level since October 2012. Imports rose 1.2%, even though America bought the least petroleum from abroad since September 2004.

During the day, the single currency found support versus the U.S. dollar after an initial brief fall to 1.1272 in Asia and then ratcheted higher after European open. In European trading, investors shrugged off the downbeat German industrial orders and pushed price higher to 1.1220 in European morning, then further to 1.1274 in New York morning after wider-than-expected U.S. trade deficit dampened optimism over the strength of the U.S. economy.

Data on Tuesday showed that German factory orders fell to a seasonally adjusted -1.8%, from -2.2% in the preceding month whose figure was revised down from -1.4%.

U.S. dollar moved in a volatile fashion versus the Japanese yen on Tuesday. Although the usd/jpy pair came under renewed selling pressure in Asia after rising marginally above Monday's New York high of 120.55 to 120.57 and then fell to 120.13 in European morning, renewed cross-selling in yen on improved risk appetites lifted price to 120.50 in New York morning before falling to a fresh session low of 120.11.

The British pound moved closely with euro on Tuesday. Price found support above Monday's New York low at 1.5130 and gained to 1.5168 in Asia, then 1.5180 in European morning before rallying to a fresh session high of 1.5235 in New York morning.

In other news, The Reserve Bank of Australia (RBA) held its cash rate at a record low 2% as widely expected on Tuesday. RBA said in the following statement, 'leaving rates unchanged appropriate; A$ adjusting to lower commodity prices; monetary policy needs to be accommodative; economy likely to be operating with degree of space capacity for some time; inflation seen remaining consistent with target over next one to two years.'

Moody's analyst Leos said on Tuesday, 'stable rating outlook does not mean Brazilian economy is stable; Brazil's risks are similar as those seen in baa3-rated countries such as Indonesia, turkey, India; sovereign credit scenario for Brazil is recession in 2015-2016, increasing fiscal deficit, higher mandatory spending; new scenario for Brazil includes limited near-term ability to address problems due to lack of political consensus; expects Brazilian economy to contract 0.3% on average during 2015-2018 period; it's hard to see Brazil growing at an average 2% over the next few years; estimates Brazil's average annual fiscal surplus at 0.6% of GDP for 2015-2018 period; sees Brazil government debt rising to 68.5% of GDP in the 2015-2018 period vs 54.6% of GDP in the prior four-year period; Brazil's estimated debt-to-GDP ratio of near 70% is 'out of place' vs most BAA3-rated peers; Brazil interest burden as percent of GDP significantly higher than in BAA3-rated countries; low share of non-resident domestic debt holdings is a credit strength for Brazil; high international reserves coverage of external debt payments is another strength for Brazil; Brazil banking indicators, with robust capital and liquidity metrics, are another credit strength for the country; Brazil's foreign-currency debt burden significantly below levels of BAA3-rated peers; Brazil economic environment to remain poor, political dynamics to remain unstable this and next; Brazil's stable rating outlook incorporates Moody's expectation that economic conditions will improve in the 2nd half of 2016; Brazil ratings could be lowered if country fails to deliver policies that support fiscal stability; Brazil ratings could be lowered if political instability grows further, hampering policy goals; Brazil's ratings could be lowered if Moody's concludes that government is unlikely to reach fiscal consolidation in the short term; Brazil needs GDP growth of 2% per year and primary surplus of 2% for fiscal sustainability.'

Later in New York midday, German Finance Minister Wolfgang Schaeuble said to student at Paris' Sciences Po University, 'we will do whatever we can to avoid Britain leaving the European Union.'

Data to be released on Wednesday:

Japan BoJ rate decision, BoJ monetary policy statement, BoJ governor Kuroda press conference, leading economic index, Australia HIA new home sales, Germany industrial production, France exports, imports and trade balance, ECB's non-monetary policy's meeting, UK industrial production, manufacturing production; NIESR GDP estimate, Canada building permits.