Euro Breaks 1.3500 - Any More Momentum Left?

Talking Points

  • Australian Dollar: Current Account worse but Building Approvals rise
  • Euro: PMI bit better but Retail sales soft
  • Pound: PMI Services essentially in line
  • Dollar: ISM Services on tap

Euro Breaks 1.3500 - Any More Momentum Left?
The EURUSD broke through the 1.3500 barrier in overnight trade on the back of slightly better PMI Service numbers but its rally was stymied by less than stellar EZ Retail Sales which rose only 0.2% vs. 0.5% projected. EZ Services PMI printed at 57.3 vs. 57.1 forecast with most of the gain due to the improvement in the Italian readings which climbed to 56.5 from 54.0 expected. Both the French and the German data actually missed their mark and the overall results were essentially in line with consensus calls. The euro ran through the 1.3500 figure ahead of the news but its rally was stopped dead in its tracks after the release of EZ Retail Sales.

As we suspected, last week?s the poor showing in the French retail sales data weighed on the overall number producing a very tepid 1.6% year over year increase. While consumer demand in the Eurozone is clearly improving the snail?s pace of growth must be cause for frustration for euro bulls anticipating another quick hike from the ECB after the expected bump to 4% tomorrow. While rhetoric from Eurozone monetary officials has remained resolutely hawkish, we doubt that Mr. Trichet and company will implement another quick rate hike until they see fresh evidence of stronger consumer spending in the 13 member region. For now the economic news argues for moderation and neutrality on the policy front and that in turn should keep any euro rally well contained unless US data deteriorates rapidly.
Meanwhile in Japan, the yen set new record lows against the euro and the Aussie as the carry trade marched on unimpeded. The Shanghai index staged a massive turnaround regaining more than 300 points after dropping to 3400 in midday trade only to end up +96 points for the day after Reuters reported market rumors that Chinese government and ministry officials planned to discuss how to stabilize the market. Speculation in China centered on the idea that authorities may decide to delay the imposition of capital gains tax for three years and that policies aimed to benefit the market (such as encouraging state companies to inject assets into their listed units) will continue.
The Chinese authorities are now caught between a rock and a hard place trying on one hand to reign in the speculative excess that has afflicted the Shanghai stock exchange without causing a full scale stampede out of equities. However, regulatory efforts to gently defuse financial bubbles have rarely worked in the past. Therefore, despite the fact that risk appetite in the FX market remains insatiable we continue to view the situation with trepidation and believe that it may soon create a massive spike in volatility that will result in a sharp reversal of the recent carry trade gains.
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