[B]Talking Points[/B]
• Japanese Yen: Holds below 113.00 as risk aversion sets in
• Australian Dollar: Employment less than forecast but growth continues
• Pound: Holds 2.10 ahead of BoE
• Euro: Consolidates at 1.4650
• US Dollar: Bernanke testimony center stage
A very quiet night of consolidation in Asian and early European sessions today, after last night’s fireworks that took the EURUSD to new record highs above the 1.4700 figure. The currency markets are now focused on guidance from monetary authorities as we have rate announcements from both BoE and ECB as well as Congressional testimony from Chairman Ben Bernanke.
In UK the BoE is expected to keep rates stationary at 5.75% continuing to maintain the highest yield in the G-4 universe. Sterling has been remarkably resilient during yesterday’s round of risk aversion maintaining the 2.100 level for most of the day. With house price values continuing to record double digit annual gains, most currency analysts do not expected the UK central bank to lower rates this year, despite the fact that Manufacturing and Service PMI data is starting to show significant signs of slowdown. The BoE typically provides no commentary with its policy announcement, so traders will have to wait for two weeks to ascertain the true state of mind of UK central bankers when the minutes of the meeting are made public.
The ECB presents much greater possibility of event risk. While almost no one in the market expects the Europeans to hike rates today, the ECB generally likes to prepare the market for any future policy actions at the post announcement press conference. It will be interesting to see if Mr. Trichet will ignore the record euro strength and signal a possible rate hike in December. ECB headline inflation remains well above the central banks self imposed target of 2% and all things being equal Mr. Trichet would no doubt prefer to raise rates another 25bp. However, given the tremendous amount of dollar bearish sentiment in the market, his comments could push the EURUSD to 1.500 within a matter of days were he to maintain his hawkish posture.
It remains to be seen whether the export driven EZ economy could absorb such a massive exchange rate disadvantage for much longer There are clear early signs that the manufacturing sector is beginning to feel the pain if the high euro, as PMI gauges hover near the 50 boom/bust line. Nevertheless, Mr. Trichet whose first policy allegiance is to price stability, may choose to err on the side of controlling inflation rather than stimulating growth. For the time being such an outcome would likely propel the euro higher as markets continue to price in the compression of interest rate differentials in the pair.
