Euro and Yen Stall, but Aussie Shows Strength

Talking Points
• Australian Gross Domestic Product twice as strong as expected
• Japanese Leading Economic Indicator prints in line
• German Factory Orders mixed
• USD ADP on tap

Euro and Yen Stall , But Aussie Shows Strength
A very bland night of trading as both the EUU/USD and USD/JPY essentially marked time through out Asia and early European trade with neither region having any meaningful economic data on the calendar. In Japan the LEI data registered a weak reading of 35% - well below the 50% boom/bust level. This is the third consecutive month that the LEI has recorded a value below 50 and the news suggests that economic growth going forward remains problematic.
That sentiment were echoed by BOJ deputy governor Iwata, one of the dissenters on the Feb. 18th rate hike decision, in a press conference earlier tonight, where he informed the market that “The BOJ has published a price forecast for only fiscal 2007/08. I thought a rate hike could wait until after we explain our views on prices more in detail - for instance, in our (April) outlook report.” Mr. Iwata continues to be concerned about the weakness in both consumption and wages in the Japanese economy and his worries constitute the core of the yen bearish case which may invite new carry trade positions if the market becomes convinced that last week’s volatility is ready to subside.
Meanwhile in the EZ the only release of note - German Factory Orders – produced mixed results dropping -1.0% on a seasonally adjusted basis but rising 7.8% on a yearly non-seasonally adjusted basis. More importantly however for euro longs the prior’s months data was revised higher indicating that the mighty manufacturing sector which has been the principal agent of growth in the region continues to perform well. The performance of European industry remains key to handicapping future ECB monetary policy moves. As long as that sector expands, generating new jobs, the ECB is likely to maintain its hawkish bias. However, given the fact that consumption in the region remains moribund after the hike in VAT taxes, the whole EZ economy is still very vulnerable to a slowdown and therefore a possible reversal in monetary policy, as the composition of growth in the 13 member union continues to be unbalanced.
Finally, the strongest news of the night came from Australia, where tonight’s GDP figures surprised to the upside printing at 1.0% - double the forecast. Australia’ s consumption demand remains surprisingly vibrant, helped by strength in the services sectors and although RBA kept rates on hold today, Governor Stevens indicated that the central bank may be more inclined to raise rates this year given the threat of inflation. Today’ positive GDP figures provide the Australian monetary authorities with the proper economic support to raise rates later in the year assuming GDP growth maintains pace. Furthermore, if the RBNZ – which is expected to raise rates by 25bp later in the day today - decides to stand pat, the AUD/NZD cross could see large buy orders in the wake of such a surprise as traders re-price rate expectations between the two currencies.