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US trade deficit not sustainable
- Audio interview with David Wyss, Chief Economist, Standard & Poor's
- The US economy is currently doing "a lot better" than expected says David Wyss. Manufacturing data has been strong and the picture on the US budget deficit is improving faster than anticipated. The situation in the Middle East, continuing trade deficit and high price of oil all remain concerns, he adds.

So is cable or a sell, MM?

:o)

Hil: You tease.

But . . . I reckon Cable is on a downtrend over the next few months. I'm rather hoping it will reach its nadir in December.

Short term, you know a great deal more than I do . . .

I think so too, MM - been trading only short since around 1.83.
I doubt it'll break 1.77 again in a while.

MM,

Economists and analysts make me die. Any idiot can turn round and say that it's falling after cable's just come off 1400 pips in a little over 2 months. But what were the same folk saying at the start of May when it was around $1.89? Fillyerboots 'cause we'll soon break $2.

I think that it's called "Being Wise After the Event".

What those guys are possibly overlooking is that at the current level of $1.75 there is a long term rising support line passing through the lows of March 2002 and September 2003. Will it hold? You can only trade what you see on whatever chart you happen to be trading at the time.

It does strike me though that once the World, his wife and their dog are all long the greenback then it can only go one way. Down.

And fundamentally? Surely it's a case of which economy is least shagged rather than which is the healthiest.

Whilst I agree that we might see an August cut in UK interest rates, my money's on 7% or 8% in the UK over the next couple of years. I think that consumer debt could be the key there and Joe Public isn't bleeding badly enough yet. He will do.

And what about US Crude at $60? Six weeks into the driving season and it's being overlooked. Another month and it should come to the fore.

And TIC yesterday? $60b covered the trade deficit and was in-line but I felt that they were expecting more. Is that any reason to be bullish? My feeling is that you've been witnessing an unwinding of the carry trade these last couple of months in anticipation of a BoE autumn cut. Ultimately though, we've still got 1.5% on the carry.

Food for thought?

L & K,

A Contrarian Hil.

:o)

Thanks Hilary

Agree with you re the contrarian bit - analysts are wonderfully wise after the event.

Could explain "carry trade" for me. I presume its's something to do with expectations of future interest rates.

Thanks

Seymour "Much to learn" Clearly ;-)

Seymour,

It's the process of borrowing money in a country which has low interest rates and investing it (typically into bonds) in a country with a high interest rate or yield. The yield is used to service the loan.

You experience something similar when you hold rolling positions overnight in that you are either paid or you pay interest on the position according to the interest rate differential between the two sides of the pair. Similarly, it is the reason why quarterly futures contracts are skewed so far off spot.

While US interest rates were only 1%, the cable carry trade was attractive and it is obviously not so at the moment.

Thanks Hilary, much appreciated.

The more I know the harder it is to understand !!!

Seymour,

No problem. It's why interest rate events and speculation move the market so much.

For instance, yesterday morning cable fell sharply onwards of 7am whilst the Euro held reasonably firm against the Dollar. The reason being that the Rightmove House Price thingey had been published on Sunday evening (see calendar above). It showed house prices had fallen quite dramatically which in turn heightened speculation that UK interest rates would fall sooner rather than later. Virtually every piece of economic news can be extrapolated into the likely effect on interest rates and, therefore, the effect on that particular currency.

And we still have the BOE minutes to follow tomorrow.

Indeed Choccy. Greenspan as well.

Two down, one up and six holds last month, but it was the last month for one of the members' who voted down (was it Marion Bell???). Market says 6-3 this month, but I'll be a little surprised if it is.

edit: Apparently it was 7-2 last month - I thought it was 6-2-1. Oh well.

Just wondering whether the minutes effect is in the price already after last time.

BoE kept benchmark rate unchanged in July by close 5-to-4 vote
AFX


LONDON (AFX) - The Bank of England came within a whisker of lowering interest rates by a quarter point in July, strengthening expectations that a cut will materialise in August.

The minutes to the July meeting, published this morning, showed that the number of dissenting votes doubled to four in July from just two the previous month.

The votes for a reduction came from Kate Barker, Charles Bean, Stephen Nickell and the Monetary Policy Committee's newest member, David Walton in his inaugural vote.

The majority, led by BoE governor Mervyn King opted to keep the benchmark repo rate unchanged at 4.75 pct for the 11th month running on July 7, the same day when the public transport system was attacked by terrorists.

Markets will find ample reason to back up rate cut expectations in the latest set of minutes. For one, the close 5-to-4 vote was not expected.

The dovish four who had voted for a cut said the downward revisions to quarterly GDP made in late June warranted lower borrowing costs. They felt that since economic growth had been below trend over three quarters, this implied 'a softer outlook going forward.'

They cited the risk that household spending may fall even further given the heavy debt burden carried by UK consumers.

Market predictions that interest rates will be lowered may have to be met in order to prop up consumer spending, they said

'Although the change in market interest rate expectations could prove supportive of household spending, it would be necessary to validate those expectations to some degree if that support were to be maintained,' they said.

Additionally, they said that business investment was 'more likely to disappoint' while the labour market 'appeared to be softening slightly.'

One rate setter even went so far as to say that 'monetary policy was no longer accomodative,' the minutes revealed.

Overall, the doves said a cut in July would reduce the risk of greater changes in the benchmark rate at some point in the future.

The majority on the other hand felt that a rate cut right after GDP growth for the first quarter was revised down may send out wrong signals to the market.

It could, they felt, 'be misinterpreted as an attempt to target output' and not inflation.

They felt there was 'no great risk' in waiting for more evidence and analysis before changing the benchmark rate.

The minutes also revealed that the MPC learnt about the bombs that rocked London towards the end of its policy meeting.

None among the nine-member panel felt that the bombings should alter the rate verdict that day.

sivakumar.sithraputhran@afxnews.com

That'll be why cable just dropped off the cliff, then?

Certainly is Helen - and the Pound isn't faring any better against Euro either.

Just shows how easy it is to make mistakes. I thought the minutes came out this afternoon and didn't have the sense to check. Fortunately too busy looking at stock positions to look at cable. Phew

So's you don't forget, Helen ;)

Alan Greenspan Speaks! Wednesday - Jul 20, 2005

10:00 AM ET : Federal Reserve Chairman Alan Greenspan to deliver semiannual monetary policy report to House Financial Services Committee, in Washington .

Alan Greenspan Speaks! Thursday - Jul 21, 2005

10:00 AM ET : Federal Reserve Chairman Alan Greenspan to deliver semiannual monetary policy report to Senate BankingCommittee, in Washington .

Thanks for that Choc :o)

Well well well - we're almost back to where we were at 9:30 :)

Couldn't resist the temptation to have another bash at cable tonight, having sold a relative to raise a small pot.
Still got the old touch! those of you with minute charts can see the point I took a trend long @ 85, exactly 2 minutes before it fell straight through! (19:07 for the lazy)
S & R'd it from the piqued school of trading for -11.
Too old and slow though, 1 point between close & open, (@ 74 & 73), and just left the bugger to slide down the other side, stopped for + 41, best i've done for weeks.
Now changed tack, sod the trend line, left a -0 stop loss on a cable short @ 37.