[B]Talking Points
• Japanese Yen: LEI in line yen firms as equities sag
• Euro: Trichet effect still play but slowdown evident
• Pound: Weaker as markets anticipate more cuts
• Canadian dollar: Employment data ahead
• US Dollar: Trade data on tap[/B]
The EURUSD continued its rebound from multi-week lows in the aftermath of yesterday’s very tough, unapologetically hawkish press conference by ECB President Jean Claude Trichet. Mr. Trichet essentially stated that European monetary authorities have no intention of lowering rates anytime soon given the elevated level of inflation present in the region’s economy and will continue to focus on controlling price pressures rather than bolstering waning economic demand.
Mr. Trichet’ s take no prisoners stand surprised some market players who expected a more conciliatory tone that would acknowledge the growing evidence of an economic slowdown in the Euro-zone. Yet tonight’s economic data perfectly reflects ECB’s dilemma. German wholesale prices registered a gain of 6.9% on a year over year basis as energy costs continued to expert enormous price pressures on the country’s producers while at the same time French Industrial Production fell –0.8% versus –0.4% expected. The EZ economy is clearly experiencing the worst of both worlds as it simultaneously faces contracting demand and rising prices.
Nevertheless, for the time being the ECB has decided to address only inflation and its decision to hold rates steady for the foreseeable future has given euro a temporary boost as speculative capital returned to the currency attracted by its 4% yield. We’ve long argued that the ECB will not make any meaningful moves on the interest rate front until the employment situation in the region begins to deteriorate. While labor markets in the EZ continue to expand, given the persistent evidence of slowdown in business demand we believe it is just a matter of time before employment data in the region turns negative forcing ECB to abandon its restrictive monetary policy. Therefore any gains in the pair are likely to be limited, unless EZ economic situation improves as the summer progresses.
Trading for the rest of the day will likely take its cue from the North American calendar which contains Canadian employment numbers and US Trade data. The US trade balance is expected to contract every so slightly from the month prior, but soaring energy prices could negatively skew final results. FX traders may zero in on the Non-Petroleum Trade numbers to determine if the weaker dollar continued to help correct US trade balance position in March. If the answer is no, the EURUSD may make a run at the 1.5500 level before the week is over.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]