[B]Talking Points
• Japanese Yen: below 101.00 on equity flows
• Euro: Gaps Down but recoups most of the post G7 losses
• Pound: Hot PPI provides little support
• US Dollar: Retail Sales on tap [/B]
After gapping down more than 100 points on Sunday night following the change in the G7 Statement the EURUSD erased most of its losses on the back of some bargain hunting and better than expected EZ Industrial Production data. The battle in the currency market continues to revolve around two key themes- decoupling and spillover. Euro bulls have consistently claimed that the EZ economy has separated itself from the troubles in US allowing the ECB to remain staunchly hawkish. So far they have been completely correct and the unit has benefited greatly from its interest rate advantage over the greenback which continues to expand.
The bears on the other hand, argue that the slowdown in the US will inevitably spill over into the EZ economy sooner rather than later. However, the economic data has been in the side of euro bulls and today’s Industrial Production numbers out of the EZ were no exception printing at 0.3% vs. 0.2%. European producers are growing their book of business despite the twin obstacles of high exchange rates and slowing global demand.
How long that dynamic will continue remains to be seen, but until it stops the dollar will have a hard time gaining any traction. As we noted in our weekly, “If the dollar is to see a sustained rally, traders will need to see some evidence of slowdown in the EZ. For now the G7 statement has provided a temporary boost for the buck, but it will only hold those gains if currency traders start to see some deterioration in the EZ and begin to believe that the decoupling thesis is about to crumble.”
In UK the hot PPI data which printed at 0.4% versus 0.3% on a core output basis provided only tepid support for the pound. No doubt inflationary pressures continue to persist in the UK economy and are in fact a full 100 basis points above BoE target rate of 2%, However, the slowdown in UK demand may prove to be a bigger concern to MPC members as we move towards the summer months and therefore currency markets continue to anticipate further monetary easing in Q2 of 2008.
Finally in US today, the markets will get a read on March’s Retail Sales and frankly the forecasts are subdued. Consensus calls are for a small rebound to 0.2% from –0.2% the month prior. Yet given the bleak mood surrounding the US economy even a small rise such as that may be viewed positively by the market suggesting that the US consumer has not capitulated completely. If on the other hand we see another negative reading in the report, the dollar could face new lows against the euro as they day progresses with the decoupling thesis continuing to dominate trade.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]