Euro Hits All Time High, But Where is the Follow Through?

[B][U]Talking Points
[/U][/B]- Japanese Yen: gets mild bid off Abe resignation

  • Euro: Hits all time high on stop running
  • Pound: Labor wage data remains firm but King comments weigh
  • Dollar: only MBA on tap

The EURUSD hit an all time high against the dollar as a combination of hawkish commentary from the ECB and some stop running in the Asian session, helped to push the pair to 1.3883 before it retraced some of its gains. Commentary by ECB President Jean Claude Trichet that, “Risks to price stability remain on the upside,” as well a statement by ECB executive board member Stark that, “No one has said that we have abandoned a further hike, a further rate move” all suggested that European monetary officials are maintaining a hawkish posture despite the continuing uneasiness in the credit markets.
Overnight news from the EZ showing Industrial Orders jumped 0.6% from 0.2% forecast along with the hotter than expected readings in EZ labor costs which increased 2.5% all provided fuel to euro longs who argue that the ECB will need to tighten further in order to curtail inflationary pressures. The bottom line is that markets are forecasting a cut in US rates while still projecting a hike from ECB and the divergence of those expectations is driving order flows towards the euro. If the unit can reach the 1.3900 level, 1.400 may be a forgone conclusion as momentum and stop hunting will likely lift the pair higher. Still, the follow through tonight was rather limited as markets remain in the wait and see mode. The marquee event this week will be US Retail Sales on Friday which will reveal just how much strength is left in the US consumer. A hotter than expected number will quell any idea of a 50bp cut and may even put a 25bp cut in doubt, reversing some of the anti-dollar sentiment that has been so prevalent this week.
Meanwhile the resignation of PM Abe in Japan had only a muted impact on the yen, as Mr. Abe?s departure was widely anticipated given his stark unpopularity amongst the voters. Speculation will now focus on his successor, but whoever assumes the office will likely follow a dovish yen policy in light of the very weak GDP reading in Q2. Furthermore, given the current political uncertainty, the BOJ will be even more circumspect that usual in guiding monetary policy and may remain stationary for the rest of the year. In short such a policy course will keep Japanese rates at only 0.5%, making the carry trade attractive any time risk appetite returns to the market The yen therefore should continue to weaken unless a new wave of fear sweeps across capital markets and risk aversion becomes the order of the day.