Euro Rises as Carry Back in Play

• AUD RBA keeps rates on hold
• GBP IP contracts for 2nd time in 3 months
• EUR German IP sharply lower but prior revised upward
• USD Productivity on docket

With US and Japanese officials downplaying the possibility of any substantive discussion of yen weakness at the upcoming G-7 meeting, traders returned to the carry trade steadily buying EURJPY from the start of the Asia session which in turn drove EURUSD to hit the 1.3000 level in early European trade.
The euro also received a bit of a boost from reports that ECB officials were not happy with the MNI story last week that they will halt rate hikes after a 25bp bump in March. The EZ central bankers want the flexibility to hike further should growth risks move to the upside. Furthermore, as all monetary officials they would like to retain some element of surprise in order to exert power over the markets. The MNI story, if true, would have essentially relegated them to “lame duck” status as it would have taken monetary policy out of the equation for the currency market for the rest of the year. Therefore, tomorrow’s ECB press conference could be particularly interesting as President Trichet may decide to assume ultra hawkish posture in order to reassert authority over the market.
On the economic front, the news was not supportive to either euro or the pound as both German and UK Industrial Production reports missed their mark. In UK IP recorded a reading of -0.1% vs. 0.2% expected with large declines in oil and gas production and a 3.7% drop in quarrying and mining. The news could negatively impact Q4 UK GDP, however with oil 18% higher since the time of the IP report, the numbers next month could well bounce back. The currency market shrugged off the data, with the pound recovering all of its post release losses by the New York open.
Finally, while the yen once again resumed its downward path against the other majors, the move has been relatively muted. As we noted several days earlier, with so much bad news baked intro the currency, it will require significantly worse data from Japan in order for USDJPY to overcome the 122.00 hurdle. Furthermore, while G-7 may not overtly call for yen strengthening, it could still make a powerful reference to the issue. Therefore we continue to believe that the risks in the pair lie to the downside for now.