[B]Talking Points
• Japanese Yen: Breaks Below 108.90 As Risk Aversion Increases
• Euro: German Import Prices Hits 8 Year High
• British Pound: Holds Above 1.8400 Amid High Volatility
• US Dollar: Durable Goods Orders and Mortgage Applications On Tap[/B]
Euro Bounces Back, Will Weak Durable Goods Orders Extend Its Gains?
The Euro retracement continued from yesterday bouncing from support at 1.4600, but following choppy price action the EURUSD has consolidated in a range between 1.4730 and 1.4670. Profit taking and heighten geopolitical risks have impacted flows as the economic calendar was virtually empty. On the economic front, German import prices in July rose to 9.3% from 8.9% in June. Rising import prices does not bode well for Europe’s largest economy as companies continue to battle slumping demand and shrinking profit margins.
German import prices surged to an 8 year high on the back of higher oil prices, and may continue to fuel inflationary concerns for the ECB. Yet, August inflation data from the various German regions showed prices easing as much as 0.4%. The fall in CPI demonstrates that dropping oil prices and slowing growth are relieving price pressures and will give the ECB the green light to abandon their price stability mandate to focus on promoting growth. The markets have already begun to price in easing from the central bank in 2009 which will continue to weigh the Euro lower. Although we may see the Euro strengthen in the short term, the potential decline in interest rate differential may lead eventually it lower against the greenback.
The USDJPY weakened during the overnight session as risk aversion is creeping back into the markets on the back of lingering concerns financial sector concerns and geopolitical risk. The turmoil between Russia and Georgia has started to take the life of newer version of the cold war with Russian leaders calling on support from China. As long as the Fannie Mae and Freddie Mac situation remains unresolved and the potential exists for the Russian conflict to escalate, the Yen will remain supported.
A weak durable goods orders report and rising oil prices on the back of a tropical storm threatening the Gulf of Mexico, may lead to further dollar weakness. Demand for long lasting goods is expected to have remained flat in July as the effect from the fiscal stimulus plan faded and demand from abroad declined as global growth slowed. The truer measure of demand is the ex-transportation reading which is expected to decline 0.7%. The reading stripped of volatile purchases of airplanes could show that the domestic growth is weakening absent the government help. A larger than expected decline in orders will raise recession concerns once again and with the housing market yet to bottom and financial sector concerns remaining, we could see the dollar give back some of its recent gains.
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