Euro Driven Lower as Consumers Retrench

· Aussie: Confidence Board LEI falls after 6 months
· Yen: All industry in line
· Euro: French consumption declines and does Italian spending
· US Dollar: Existing Home Sales on tap

The EURUSD drifted lower in early European trade today as the latest consumer data from the region, raised questions about the strength of the EZ consumer recovery. Consumer spending in both France and Italy contracted materially last month. French data showed a decline for the first time in 5 months while Italian Retail Sales fell much worse than expected, printing at –0.4% vs. 0.2% forecast. The drop in the Italian readings was the worst in nearly two years. The extent of the retrenchment surprised the currency market where most of the players were under the impression that EZ consumer spending woes were no longer an issue for the worlds second largest economy. The persistent weakness in EZ consumer demand stands as a strong counterpoint to the robust economic growth amongst the regions’ producers and highlights the imbalances still present in the system.

That unhealthy dynamic was not lost on ECB policy makers. Sovenian Central Bank Governor Mitja Gaspari addressed the issue indirectly today when he stated that it is premature to talk about more rate increases noting that current interest rates are “appropriate”. Clearly the ECB has decided to observe how well the EZ economy digests the most recent series of rate hikes before imposing any additional tightening on the market. Therefore, with consensus now coalescing around May as the earliest possible date for the next ECB rate hike, the euro came under more profit taking pressure as traders saw no immediate catalysts for further gains to the unit.

Meanwhile yen finally saw some strength as trading in Asia Pacific came to a close this week. The USDJPY pair dropped from the 118.20 highs to 117.50 by the London open as profit taking, a strong result in the All Industry Activity Index and mixed performance in the region’s equity markets all contributed to the rally. Although the Nikkei was up marginally, other bourses in the region including Australia, South Korea and Singapore all registered losses, suggesting that the rebound in world equity markets may be coming to an end. The yen may see further gains today if the US stock markets decide to sell off into the weekend.

Today’s US trade could be l determined by the Existing Home Sales numbers. If the housing sector shows a worse than expected drop – and given the horrid weather conditions and lackluster consumer sentiment in February, there is good chance that it will – markets will begin to fear a downright recession in the US economy. That turn of events will likely benefit the low yielders like yen and the Swissie as capital will run to safety. On the other hand, any surprising strength in the release will present a powerful counter argument to all of the doomsday talk that has recently surrounded the dollar. Yesterday’s drop in the weekly jobless claims indicated that US economy remains remarkably resilient and a positive read from the Existing Home Sales report would further confirm that point of view.