[B]Talking Points
• Japanese Yen: Continues to strengthen on risk aversion and anti-dollar flows
• Euro: Retraces as EURJPY sales and weak ZEW weigh
• British Pound: CPI in line, core bit softer but gets a bounce
• US Dollar: PPI and Retail Sales on Tap[/B]
The pound staged a strong bounce off the lows in early London trade today as UK CPI held above BoE’s 2% target rate for the third month in a row, putting any notion of imminent monetary easing on hold. UK CPI printed at 2.1% versus 2.0% forecast with RPI data remaining at a lofty 4.0% level. The core readings were a bit more muted coming in at 1.4% vs. 1.5% expected but the overall news suggested that price pressures remain in the system and will make BoE decision making process more complicated as Mr. King and company weigh the problems of inflation against the slowdown in economic activity.
In any case, cable which was woefully oversold managed to stage a mild rally recapturing the 1.9600 level as many of the late shorts covered their positions in the aftermath of the release. Yet, despite the undercurrent of inflationary forces the BoE may have to lower rates next month if monetary authorities see further deterioration in consumer demand. To that end Friday’s UK Retail Sales data could be crucial to determining the near term direction of both rates and sterling itself.
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In Euro-zone meanwhile, the data was unimpressive as the ZEW survey hit a 15 year low on expectations of a looming US recession that could negatively impact the region’s investment climate. The ZEW however has been a poor gauge of true EZ strength as it has been declining consistently over the past several months as euro rallied. Tonight, the euro retraced some of yesterday’s gains, partly on the tepid ZEW news and partly on EURJPY flows which saw the cross drop below the key psychological level of 160.
Over the past two years the EURJPY cross has become the marquee carry trade and the primary proxy for risk appetite in financial markets. It’s slow but steady drop through the 160 level suggests that risk aversion continues to escalate in the currency markets and bodes badly for the future of the carry trade in 2008. Nevertheless, the euro itself may continue to rally, but driven by pure anti-dollar sentiment rather than carry trade demand.
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One of the key drivers that could stoke more dollar selling would be another weak US Retail Sales number due 13:30 GMT today. The market already expects a negative result of -0.1% ex-autos, but should the data print even worse, expectations of a 50bp cut would rise almost to a level of near certainty and talk will shift to the possibility of a 75bp cut. This scenario is likely to weigh on the greenback and could send the EURUSD to re-test its record highs this week.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]