An Exciting Week ...
We are entering an exciting week tomorrow/today.. how severe will the slide of the dollar be, what indeed will the ECB say (we all know what they are going to do), and how will the US labour market report look come Friday?
Currency markets will open on edge on Monday after last week’s sharp decline in the dollar, with traders looking to new economic data and the tone from the European Central Bank for fresh reasons to trade on the dollar.
The latest bout of dollar weakness has occurred as currency markets have developed a growing belief that the US economy is in worse shape than the Federal Reserve claims. They have also been encouraged to buy the euro by the lack of concern expressed so far by ECB officials about the rise of the single currency.
On a trade-weighted basis, the dollar has declined nearly 4 per cent since the middle of October, with more than half that fall being recorded since November 20.
The ECB will this week be watched closely for clues about future eurozone interest rates.
What is interesting here is that markets are disregarding the commentaries from Bernanke about vigilance agains inflation which are alluding people to claim that the US economy and USD really are in for a rollercoaster ride because markets are beginning to bet against the Fed. This is only a part of the in my opinion and whereas it is perhaps unclear what course the Fed is taking going into 2007 markets can always count on good old Trichet and his gang at the ECB. Now, when they speak of vigilance against inflation they mean it and a raise it will be no matter how fact defying such a move will be at this point. There are some though which have the important points ...
Despite increasing signs of weakening demand in the world's biggest economy, ECB chairman Jean-Claude Trichet has insisted the 12-member single currency zone can shrug off a US slowdown.
'The ECB's in a complete state of denial,' said Paul Mortimer-Lee, global head of market economics at BNP Paribas. 'Quite a lot depends on how Trichet plays it at the ECB press conference next week. They're hankering after raising rates again next year.'
All this of course brings us back to the idea of 'de-coupling' and whether the rest of the world can weather a US slowdown. Much here of course depends on the severity of the evident US slump. However, in the Eurozone where growth is already slowing going into 2007 (quarterly estimates) the ECB would do well not to play this Don Quixote game in the attempt to demonstrate that the Eurozone is strong enough to completely disregard what is going on elsewhere. In short, de-coupling is all well and good but the Eurozone won't de-couple with a raising ECB propping up the Euro in the process. In the end this is also why I have persistently argued lately that this Euro/Dollar fuss is a fool's game because the ECB basically is locked in towards raising at least once and perhaps also in the beginning of 2007. However, at some point reality will also reach Frankfurt and it will become clear that there is a structural limit here. Also remember to look closely at Japan and key data on the export sector. Perhaps India and China have strong enough momentum to weather the US slump, difficult to say. Stephen Roach does not think so (see The Guardian linked above) and clearly he has a point on China since exports to the US is a major driver of growth here. The bets are still out on this one.