[B]Talking Points
• Japanese Yen: Risk aversion continues as yen heads towards 100.50
• Australian Dollar: employment growth continues
• Euro: French IP positive momentum pushes towards 1.5900 ahead of ECB
• Pound: Trade Balance in line
• Canadian Dollar: Trade on tap
• US Dollar: Jobless claims on tap[/B]
The euro staged a furious rally ahead of the ECB rate decision at 11:00 GMT taking out its all time high of 1.5900 in early European trade. Over the past several days market consensus has coalesced around the idea that ECB chief Jean Claude Trichet will continue emphasize the importance of controlling inflation while minimizing the burden of high exchange rates. Aided by relatively positive economic data which included better than expected Trade Balance numbers from Germany last night and stronger than forecast French Industrial Production tonight, euro bulls have completely dominated trade this week as the decoupling theme came back into vogue in the currency market.
If Mr. Trichet does indeed stick to his hawkish script, the pair could try to target the 1.6000 level before the end of the day. However, as we noted in our central bank preview “if Mr. Trichet chooses to de-emphasize price pressures and instead focuses on the possible downside risks to the Euro-zone economy, traders will interpret his words as a sign that the ECB’s monetary policy bias has turned from restrictive to neutral. In that case, with no future prospect of any additional rate hikes in the Euro-zone, traders are likely to sell the euro across the majors on a wave of profit taking.”
For the time being euro longs have the upper hand, having erased the all time highs with relative ease tonight. The pair is now trading on pure momentum alone and standing in front of these type of runaway markets can be extremely dangerous. Still, the question of how high is too high must be a concern to EZ monetary officials and given tonight’s price action Mr. Trichet may decide to choose his words carefully in the post announcement press conference in order to not aggravate the situation further. As we’ve been reporting, the economic situation in the EZ is far from uniformly positive, with producers continuing to experience relatively healthy growth, but consumers beginning to retrench.
Regardless of their ability to overcome high exchange rates so far, EZ producers are sure to feel the pinch in profits should EURUSD rise above 1.60 amidst increasing signs of global economic slowdown. Therefore even if the EURUSD clears 1.6000 any further progress is likely to be limited while volatility could increase tremendously. We would not be surprised to see 200+ point range in the pair today before the North American session is over.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]