[B]Talking Points
• Japanese Yen: Pops to a few pips of 107 as Nikkei bounces
• Euro: Attempts a recovery of 1.4800 but option barriers weigh
• British Pound: PMI construction lower but cable above 1.9700
• US Dollar: Factory Orders on tap, expected to bounce [/B]
A relatively calm start to the week in currency trading with the dollar up slightly against the yen as Nikkei gained more than 200 points providing a boost to carry trade flows. The euro meanwhile tried to stabilize at the 1.4800 level after staging a massive reversal on Friday when it failed to hold the 1.4900 figure despite much worse than expected US NFPs.
Much of the price action in the EURUSD over the past several days has been driven by technical rather than fundamental factors as defense of option barriers at the critical 1.5000 level put a lid on any upside momentum. Still, the units surprising lack of strength in light persistently bearish US data is not all technical in nature. The simple truth is that many market participants do not believe that the ECB will be able to sustain euro’s interest rate advantage over the greenback for any significant amount of time.
The consensus view is that the slowdown in US economy will curb growth in Europe sooner rather than later and ECB officials will be forced to change their monetary policy from restrictive to accommodative following the lead of the Fed. However, the “recoupling” scenario is far from certain in being borne out. Undoutably, most recent EZ economic data has shown signs of deceleration, especially in consumer spending and sentiment gauges. Even tonight’s Sentex survey of investor sentiment missed forecasts printing at 4.3 vs. 5.7 projected.
Yet inflation in the region has remained stubbornly high. Tonight’s EZ PPI recorded a reading of 4.3% on a year over year basis – well above the ECB’s 2% target. Given the persistence of price pressures in the EZ, Mr. Trichet and company are unlikely to initiate any easing actions unless the labor situation in 15 member union begins to suddenly deteriorate. However, the latest unemployment data shows that labor demand remains strong and therefore the market may be underestimating the duration and extent of the positive interest rate spread between the euro and the dollar. Once traders recognize that euro’s interest rate advantage may last for the rest of this year and beyond, the pair should resume its upward trek.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]