[B]Talking Points
• Yen: Gains as Nikkei dives nearly 400 points
• Swiss Franc: SNB holds as expected offers little hope of hike
• Pound: Hot inflation expectations help cable despite weak RICS
• Euro: Hover at 1.4700 but French CPI data hot
• US Dollar: Retail Sales on tap[/B]
Yen gathered strength in overnight trade as the Nikkei tumbled by nearly 400 points on the back of worries that the worst of the sub-prime crisis may not be over and could infect the Japanese financial sector much in the way it affected US and European banks. Bank of Japan Deputy Governor Kazumasa Iwata said the effect of the U.S. subprime mortgage problem is gradually spreading among Japanese lenders although the impact hasn’t been serious so far. “The effect is gradually spreading, more than we had initially anticipated,’’ he noted in a speech in Tokyo today. The Japanese equity markets continue to fear a slowdown in the US economic demand which would weigh heavily on the export-dependent economy.
The key to the health of the US economy is the state of the US consumer. To that end today’s Retail Sales may prove to be the pivotal release of the week as it will show what impact if any the decline in housing is having on consumer demand. The market anticipates a gain of 0.7% in the ex-autos component and should the number meet or beat expectations it will go a long way in alleviating concerns of an impending slowdown in the US economy. If however, Retail Sales once again produce tepid results, the markets will clamor for further rate cuts from the Fed and the dollar could weaken once again.
At present the EURUSD pair remains contained in the 1.4500-1.4800 range and should the economic news meet consensus expectations it is likely to be stay within those parameters for the rest of the year. However, if the Retail Sales demonstrate clear evidence of slowing consumer demand the euro could resume its upward trek to test the 1.5000 figure once again as rate expectation will continue to favor the single currency. Today, French CPI data shows that inflationary pressures remain elevated in EZ second largest economy forcing the ECB to maintain a hawkish policy bias.
In other news, Australian employment once again blew past expectations increasing nearly 3 times the forecast. The news from Down Under suggests that the long boom in commodities continues and could pressure wages to the upside as the new year unfolds. Should the Australian labor markets maintain this torrid pace into 2008 further RBA hikes may be in the offing.
On the other hand SNB, the last of the major central banks to make announcements in 2007, rendered its rate decision today meeting market expectations by keeping rates stationary. Furthermore, Swiss monetary authorities offered little hope of an imminent hike in 2008 setting their inflation projections at a moderate 1.7% rate for 2008. SNB President Jean Pierre Roth noted that, ”The outlook for inflation has improved if we disregard the temporary rise that will occur over the next few months as a result of the rise in oil prices.” The AUDCHF cross gained on divergent rate expectations and could continue higher in the North American session if the appetite for further risk taking remains constructive.
