FX: ECB Content With Monetary Policy, Better US Data

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While U.S. equity futures and European stocks are trading higher this morning, investors continued to bid up the dollar against all major currencies. Better than expected U.S. data helped to stem the bleeding but failed to reverse the losses. According to the latest jobless claims report, the labor market improved because weekly claims fell to 355K from 363K. Continuing clams also dropped to 3.12M from 3.262M. Next week we expect to see a big improvement in claims due to Hurricane Sandy, which shut government offices in the Northeast and prevented people from filing their unemployment benefits. Even if the data is distorted, we continue to see improvements in the labor market. The U.S. trade deficit also narrowed to -$41.54B in the month of September from -$43.79B. Imports increased but thanks to record-breaking exports, the U.S. trade gap narrowed to its smallest level since December 2010. This improvement is encouraging but was largely attributed to higher fuel and soybean prices. The trade gap with China continued to grow but based on the sharp improvement in the trade deficit with Europe, demand from the Eurozone fell significantly in the month of September. Trade activity also improved in Canada but once again, only because higher energy prices boosted the value of energy exports.

ECB President Draghi’s post monetary policy meeting press conference was also a big focus for EUR/USD traders this morning and there was a dour tone in his voice as he talked about their expectations for weak growth into 2013. The ECB does not see any major improvements in growth next year and as a result, inflation should remain subdued and won’t be a problem for the central bank in 2013 because inflation is expected to fall below their 2% target. The EUR/USD recovered its initial losses after Draghi said they have not discussed further actions for next year and even though no one has tapped OMT, its availability as an option has been enough to improve financial market confidence. In other words, the European Central Bank is worried about growth next year but content with the current level of monetary policy into yearend.

Kathy Lien
Managing Director

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