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Weekly Fx Strategy

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Sterling Deepens Gloom

Fri, Jan 11 2008, 15:27 GMT
by Ashraf Laidi

CMC Markets

The US trade deficit rose to $63.1bln in November from $57.8 bln, overshooting estimates of $59.7 bln as imports rose $6.0 bln due to a $4.8b jump in oil prices. Exports rose by a more modest 0.6 blnn. The widening trade gap increases the probability of sending Q4 GDO growth into negative territory, especially if we get further widening in the December figure.

Risk appetite trades in FX are under pressure after the Thursday Wall Street rally proves unsustainable following losses throughout Asia and Europe . Reports of a $15 billion in write downs from Merrill Lynch and new warnings from UBS are just among the factors offsetting the cheery news of BoA’s announcement to acquire Countrywide Financial and Fed Chairman Bernanke’s signaling of further easing to come. Aside from the short-term psychological effect of the Countrywide announcement, we’re unsure how the news is positive for the broader equity indices when the acquisition means that US ’ biggest retail bank will inherit a yet undetermined amount of defaulted mortgages as well as dangerous load of legal troubles. In other news, the major credit card companies are reporting rising writeoffs as a result of increasing delinquencies, with American Express said announcing a Q4 charge of $275 million to cover rising customer defaults

With the 10-2 year yield spread soaring to a fresh 3-year high at 120 bps following

Bernanke’s speech, the steepening of the yield curve means that the US fed funds rate may be cut by as much as 175-bps from its current 4.25%. We had originally been expecting 100-bps in Fed cuts for the year, but the resulting developments in the US yield curve following Bernanke’s overture to further easing are rising the probability of seeing interest rates dropping to as low as 2.75%. .

Yen Rises as Asia, Europe Shuns Wall Street Rally

More Sterling Losses

Loonie Downed by Jobs Data

Euro Set to Shed Trichet’s Gains

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Published on  Fri, Jan 11 2008, 15:28 GMT