[B]Talking Points[/B]
• Japanese Yen: Retails Sales jump but Large Stores still negative
• New Zealand Dollar: Trade Balance better
• Euro: Blows through 1.4400
• Pound: 2.06 proves difficult
• US Dollar: no data on tap
Euro gapped open to 1.4415 at the start of Asian trade today and held on to its gains as ant-dollar sentiment continued to build in the currency market with traders watching the critical 1.4500 level as the next key barrier to fall. As we noted in our weekly, rumors are starting to circulate that, “the Fed will cut rates by 50bp rather than the expected 25bp at next Wednesday’s FOMC meeting. Should that occur the EURUSD can easily hit 1.4500 as the interest rate differential in the pair will compress to a mere 25bp lead for the greenback. Already EZ 2 year swap rates are higher than those of the US indicating that fixed income markets are betting that US rates will fall below those of the Euro-Zone.”
Ironically enough, if the Fed merely cuts by 25bp the greenback may regain some ground on a relief rally, as the EURUSD remains woefully overbought, although the latest data from the COT report shows that EUR longs have not increased from the week prior and remain lower than the highs reached in July. All in all the positioning data suggests that the pair has room to go a bit further and could hit 1.4500 this week. Yet that price may be achieved before the Fed announcement and in the classic “buy the rumor, sell the news” dynamic may actually correct after the Fed rate cut.
Ultimately, however the near term direction of the pair may be determined by the US NFP data at the end of the week. The dollar bear case has been predicated on a unwavering belief that US economy is headed towards a recession which will the Fed to continue to lower rates well into 2008. Yet the recession hypothesis cannot be assured unless labor markets begin to contract. So far the fallout in housing has not had a significantly negative impact on jobs. If the US economy is able to generate 100K+ jobs this month offsetting the job losses in the housing sector with new opportunities in services and exports, the bear argument may fall flat on its face as US experiences only a slowdown rather than a full out recession.
For the time being however, the wind is clearly at euro long’s back. With no data on the docket today, if the equity markets continue to be supportive, the EURUSD could rally further and 1.4500 may be within its grasp sooner rather than later.
