[B]Talking Points
• Japanese Yen: strengthens to 110 as equity markets decline
• Australian Dollar: Retail Sales miss
• Euro: PPI
• Pound: Drops below 2.0600 as Construction PMI slows to eight month low
• Canadian Dollar: BOC on tap[/B]
Another night, another failure of EURUSD to break the 1.4700 barrier as the majors spent the early European session in rangebound, random trade awaiting key event risk at the end of this week. The euro once again made a run at the 1.4700 level at the start of London trade only to fall back sharply before rebounding on hot PPI numbers. On the economic front the PPI data printed at 3.3% - the hottest reading in 10 months and considerably higher then the ECB’s self imposed limit of 2%. Despite inflationary strains in the EZ economy, however, few market participants expect the ECB to hike rates anytime soon given the lackluster consumer demand.
A weakening in demand was evident in UK as well with construction PMI slowing to its worst pace in eight months printing at 54.3 versus 57 forecast. The UK housing market is clearly beginning to stall but whether that fact in and of itself will be enough to trigger a rate cut from the BoE this week remains to be seen. No doubt the credit crunch in global capital markets is starting to pinch the UK economy, but with yesterday’s PMI Manufacturing data surprisingly buoyant the MPC members may choose to stand pat for one more month before making any changes to monetary policy.
Meanwhile, the real price action of the night was in USDJPY which once again dropped below the key psychological figure of 110. Ironically enough the 10 year JGBs hit their lowest mark in 26 months as worries about global slowdown weighed on yields. However, yen is unaffected by any negative Japanese economic news and continues to trade strictly on risk aversion as more carry trades are unwound. With 5 central bank meetings this week, it will be interesting to see what impact the various decisions by G-10 monetary officials will have on the carry trade going forward. At present, the market anticipates a dovish slant from virtually all the central bankers. If however, the rhetoric from monetary authorities takes in a hawkish bias with no rate cuts from any of the major central banks in play, yen may once again become vulnerable to carry trade flows as traders will be relieved to find out that the yield differentials will not compress just yet.
First in cue in the central bank spotlight will be the Bank of Canada which announces today at 14:00GMT. Analyst opinion is evenly split between those who believe a rate cut is coming and those who think that the BOC will remain stationary until next year. With USDCAD having risen by 10% since hitting a low of 9050 last month, the Canadian monetary policy makers may feel comfortable in leaving rates as they are. However, with US officials almost certain to cut rates next week the pressure on USDCAD is unlikely to subside. If BOC stays pat today loonie is likely to strengthen leaving parity with the buck behind it once again.
