Euro Shrugs Off Weak Retail PMI, Japanese Data Remains Mixed

[B] Talking Points

· JPY data remains mixed
· EUR Retail PMI hit hard by VAT worries
· USD Consumer confidence on tap


Japanese data once again showed a sharp dichotomy between producers and consumers as Industrial Production increased better than expected to 0.7% from 0.4% forecast yet the improvement in business activity did not filter down to the workers with jobless rate rising to 4.1% from 4.0% the month prior and Overall Household spending registering its thirteenth monthly contraction in a row. The news offered little cheer for yen longs, yet USDJPY refused to climb higher as the pair was capped at 122.00 level for the second consecutive night. With yen so grossly oversold, disappointing Japanese economic data is now having less of a negative impact on exchange rates as most of bad news appears to be baked into the price . As the market remains at a standstill, traders will now look to the US side of the pair for clues to direction for the rest of the week. With FOMC, ISM Manufacturing and NFP all on the docket in the next three days the pair could target the 123.00 figure if US data proves supportive, but we still contend that given the magnitude of the past appreciation any forward movement in USDJPY will be relatively small.

In EZ the specter of the VAT increase continued to weigh over Germany as the country’s Retail PMI reading plunged to 43 9 from 55.2 the month prior and sent the broader EZ gauge below the 50 boom/bust level for the first time in 10 months. The market, however, took the news in stride as traders attributed the drop to one off adjustment in retailers sentiment . Of far greater importance and interest will be the results from tomorrow’s German Retail sales release. Analysts are calling for a marked improvement of 1.2% from November, but if the report disappoints as it has for the past several months, concerns over the health of the EZ consumer sector will begin to mount and could force the market to reassess the chances of another rate 25bp hike by ECB in March.
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