Euro Remains Heavy As ECB President Trichet Reiterates Dovish Bias

Despite a surge in the euro at the start of trading on Sunday, the currency eventually floundered during Monday’s US trading session amidst dovish comments from European Central Bank President Jean-Claude Trichet. Indeed, Mr. Trichet said during a speech in Sao Paulo that weaker inflation pressures “could permit decreasing interest rates” as we experience a “global economic slowdown.” This comes on the tails of the ECB’s 50 basis point rate cut to a nearly 2-year low of 3.25 percent last Thursday. Following the rate-setting meeting, Mr. Trichet indicated that the central bank is starting to become concerned about the potential for deflation and that they would most likely cut rates again. All if this seems quite plausible, as growth and inflation pressures are bound to decrease further, and as of Monday, Credit Suisse overnight index swaps were fully pricing in a 25 basis point cut in December and a 50 percent chance of a 50 basis point reduction. Looking ahead to Tuesday, the German ZEW survey of economic sentiment, a gauge of investor confidence, is forecasted to hold steady at -63.0 for the month of November. However, given the sharp economic slowdown and persistent financial market instability, there is potential for this index to fall lower and perhaps even reach a new low, as the current record low of -63.9 was set just this past July (records go back to 1991). This 5:00 ET release tends to be a very short-term market mover for the euro, with disappointing results likely to lead the currency lower upon release while a surprisingly strong number could provide it with a brief boost.

US Dollar Remains the Safe Haven of Choice

The impact on the financial markets of China’s $586 billion stimulus plan proved to be short-lived, as the overnight surge in foreign stock markets failed to boost US shares. Instead, concerns about the impact of the financial crisis on US companies like Goldman Sachs and General Motors weighed on investor sentiment, as Barclays said the credit crunch may drag Goldman to its first quarterly loss since going public while Deutsche Bank said that shares of General Motors Corp. could eventually fall to zero. As a result, the DJIA and S&P 500 ended the day down 0.82 percent and 1.27 percent, respectively, while subsequent flight-to-quality led the greenback higher. This is the same dynamic we’ve seen in the markets for weeks, as evidenced by the dismal US employment data we saw on Friday and its minimal impact on the greenback. Thus, I think it may be more beneficial to keep an eye on risks trends and data from regions like the Euro-zone and UK. Ultimately, the trend for the greenback remains bullish, but the currency could experience sharp pullbacks during times that risky assets, such as equities and commodities, surge.

British Pound Under Pressure As Inflation Figures Signal BOE May Continue Aggressive Rate Cuts

Like the euro, the British pound surged higher during the start of trading on Sunday, only to tumble throughout the New York trading session toward near-term support at 1.56. Looking at the UK data released this morning, various components of the producer price index fell more than expected during October as the plunge in oil weakened price pressures. Indeed, output prices fell 1 percent during the month, the most since record-keeping began in 1986, suggesting that producers will have little reason to pass costs on to consumers. The Bank of England has made it quite clear that they expect prices to fall dramatically, given their surprise 150 basis point rate cut last week to a 53-year low of 3.00 percent. Meanwhile, the BOE’s Monetary Policy Committee (MPC) statement showed that the Committee is extremely concerned about not only the instability in the financial markets and persistently tight credit conditions, but also the significant downside risks to growth and perhaps most importantly, the risk that inflation will fall below their 2.0 percent target. The latest CPI figures show inflation growth at 5.2 percent in October, but given the economic slowdown and drop in commodity prices, the BOE has suggested that CPI will plummet in coming months. This makes the BOE’s Quarterly Inflation Report - which is due to be released on Wednesday - all the more important, as it will either confirm or refute speculation that the central bank fears deflation. If the Inflation Report confirms this outlook, the news could trigger a large British pound sell-off as it will essentially guarantee further rate cuts.

Commodity Dollars Lose Luster Despite Jump in Commodities - Why?

Commodities like oil and gold started the week off on a strong note following the announcement of China’s $586 billion stimulus plan, as the nation accounted for 27 percent of global growth last year, according to the International Monetary Fund (IMF), and is the second-largest consumer of oil. Typically, this would provide a boost to commodity currencies like the Australian dollar, since Australia sends 15 percent of its exports to China. Likewise, the Canadian dollar tends to rise on such news due to its status as the top oil provider for the US, according to the Energy Information Administration. However, with demand for risk still fairly low, the commodity dollars have taken a hit. Focusing on Canada, data from the region has proven to be rather resilient lately, as last Friday's net employment change surprisingly rose by 9.5K in October versus expectations of -10.0K, while this morning's housing data showed that Canadian housing starts fell less than expected to 211.8K from an upwardly revised 218.6K. While both of these indicators suggest that domestic demand may be holding up rather well, the export-dependent economy is bound to feel the impact of a sharp slowdown in the US, which is Canada's biggest trade partner. That isn’t to say the commodities dollars won’t bounce anytime soon, but the long-term trend remains in favor of Australian, New Zealand, and Canadian dollar weakness.

Terri Belkas is a Currency Strategist at FXCM.