Euro Dips as Zew Misses Expectations

[DailyFx]

Talking Points
- Japanese Yen: Tokyo Department store sales at 8 month high
- Euro: ZEW drops on rate hike fears
- Pound: M&A continues to underpin
- Dollar: Housing on tap


Euro Dips as Zew Misses Expectations
The ZEW survey of German investor confidence unexpectedly declined to 20.3 from market forecasts of 29.0 as higher interest rates, higher energy costs and higher exchange rates combined to dampen enthusiasm amongst participants. This was the first month over month decline since September of 2006, but the overall reading was still the second highest level in over a year while the current expectations component reached a fresh high at 88.7
The EURUSD dropped ahead of the release as traders anticipated the worse than forecast numbers and remained below the 1.3400 figure for rest of the European session. The reaction was relatively mild however, with most market participants viewing the ZEW miss as a temporary blip caused primarily by the recent volatility in the European bong and equity markets rather than an indication of deeper economic slowdown.
Meanwhile carry trades continued to perform well as EURJPY and EURCHF set new records while AUDJPY hit a 15 year high. Governor Fukui noted that monetary officials were well aware of the potential market impact of FX actions and stated that its was important for Japanese real interest rates to rise over time in order to help fund pension plans. However, he did not offer any new information to the market and his remarks had no effect on price action. Nevertheless, it appears that Japanese authorities are finally becoming concerned about yen?s weakness as USDJPY approaches the key psychological level of 125.00. The Japanese may be fearful of the political repercussions from both US and EZ officials as a result of yen? s rapid devaluation.
One key factor that most currency market players have ignored is the recent creep up in Japanese bond yields. With the 10 year JGB?s trading at 1.935% - within 6.5bp of the critical 2.00% level - the case for long yen positions has improved considerably. At 2.00% or above many of the Japanese institutions including life insurers would likely repatriate some of their invested capital from abroad generating demand for the downtrodden Japanese currency capping the one way price action in the unit.
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