[B]Talking Points
• Japanese Yen: 100 Remains the ceiling as equities down
• New Zealand Dollar: Slips below 7900 as confidence sinks
• Euro: Hovers near 1.5800 once again as inflation hits record high
• Pound: Weighed by weak Home track survey pound falls below 1.9900
• Swiss Franc: UBS problems have no impact on trade
• US Dollar: Chicago PMI on tap[/B]
Start of the week’s trade in FX saw more back and fill price action as traders braced for a slew of US economic reports culminating in the all important release of Non-Farm Payrolls this Friday. The EURUSD continued to hover on either side of 1.5800 firming up into the midday of the European session.
On the economic front, M3 figures were released showing a slight decline in growth from 11.5% to 11.3%. The data indicated that M3 growth may have peaked as global activity begins to slow, but lending to the private sector remains robust at double digit rates of 10.9%. Combined with today’s news that EZ CPI printed hotter than expected at 3.5% vs. 3.3% forecast, the monetary background in the 17 member region suggests that ECB will remain relatively hawkish for the time being. With inflation readings registering a record high in EZ, concerns about price pressures are likely to outweigh any worries about slowing growth, although early gauges point to more problems on that front. Economic sentiment survey in the region slipped to 99.6 from 100.2 and given the very weak Retail PMI readings, tomorrow’s German sales figures may show further deterioration as well.
Although, some die hard euro bulls may argue that today’s hot inflation numbers will force the ECB to consider yet more rate hikes, we seriously doubt that scenario. With US economy on the verge of a recession and credit problems roiling not only US but European financial institutions as well, at very best the ECB will simply hold the line in rates for the foreseeable future. The key report in determining just how much flexibility Mr. Trichet and company will have will be released tomorrow when the market sees the data for German unemployment figures. We have long contended that the ECB has full political cover as long as unemployment continues to decline. However, any hint of weakness in the labor market will put enormous pressure on European monetary authorities to modify their unwavering hawkish stance.
As we noted in our weekly, ”the pair has had a hard time clearing the 1.5850 resistance level on the way to challenging the 1.5900 all time highs. Perhaps the (dollar) bears are starting to run out of steam.” Assuming that there are no further shocks to the financial system, we believe that only markedly horrible NFP print of –100k or worse could push the pair above the 1.6000 level as EZ data alone will not be sufficient to achieve this task.
Meanwhile across the channel another important level in FX may be broken soon. The EURGBP came within 30 points of hitting 8000 in early London trade as news of further declines in the Hometrak housing survey weighed on sterling. Some analysts are predicting that UK housing values may decease by as much 25% leading to a serious slowdown in UK economy, which in turn will necessitate much more aggressive easing action from the BoE. For the time being however, the UK data has not provided any real indication of contraction and BoE has shown little inclination to cut rates.
Ironically enough, the very weakness in the EURGBP exchange rate may be helping to offset the negative impact of global financial woes on the UK economy as the country exports the majority of its goods and services to the EZ fueling growth amongst its producers. Tomorrow’s UK PMI manufacturing report could be determine cable’s fate in the near term. If the data declines to within a whisker of the 50 boom/bust level, the EURGBP may indeed take out the 8000 figure as traders will bet in imminent BoE easing. If however, manufacturing holds firm, the pound may see a bounce.
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