[B]Talking Points
• Japanese Yen: trades higher on back of anti-dollar flows but equities up
• New Zealand Dollar: Services PMI falls through 50
• Euro: Continues to rise on poor U of M data
• Pound: Rachel Lomax leaving cable follows euro
• US Dollar: LEI on Tap[/B]
The EURUSD broke through the 1.5600 level in early European trade today as anti-dollar sentiment continued to dominate in the wake of Friday’s horrid U of Michigan consumer confidence data which printed at 59.5 – the lowest reading in more than 28 years. Currency traders are once again concerned that US is in danger of slipping into a full blown recession rather than a mere slowdown and fear that the Fed easing cycle may have to resume.
As we noted in our weekly, “The key question going forward for currency market however is whether dour sentiment will translate into negative action causing US consumer spending to contract sharply. Certainly, stubbornly high oil prices offer no relief in sight. However, we believe that it is the job market that could deliver the knock out punch to the US consumer. Up until now consumer spending has been relatively resilient despite the challenging economic climate, in part due to soft, but not debilitating labor market conditions. However, if jobs losses skyrocket at the same time as gasoline remains above $4/gallon – that deadly combination will likely destroy whatever consumer demand is left, pushing US into a clear cut recession while driving the dollar back to its lows.”
For its part, the euro received little help from the fundamental data tonight as Construction output contracted –2.2% hitting an 18 month low. For the time being the market continues to ignore strong evidence slowdown in EZ economic demand, but in our opinion much to its own peril. If this week’s IFO survey produces yet another downward surprise, the euro will have a hard time sustaining the latest rally as EZ monetary officials will have to reassess their uncompromisingly hawkish positions.
Presently however, control of the market lies with the euro bulls as US data has turned decidedly dour shifting the focus back to dollar selling. Furthermore, there is little event risk on the US calendar this week to bolster a dollar bullish view as all three major releases from today’s LEI to Tuesday’s PPI to Friday’s Existing home sales are all expected to show further deterioration in demand.
If the dollar is to find much reprieve this week it will be from disappointing news from the EZ. However, if that scenario does not occur, EURUSD could break out of this 1.5400-1.5700 grinding consolidation range and try to make another run at the all time highs. For now the 1.5500 figure still represents the level of equilibrium but the momentum has shifted in the direction of the euro bulls.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]