[B]Talking Points[/B]
• Japanese Yen: 114.00 proves to be strong support
• New Zealand Dollar: Rates held steady
• Euro: IFO mildly better but continues to show decline
• Pound: BoE Financial Stability Report unexpectedly downbeat
• US Dollar: Durables on tap
Another night of range bound lackluster trade in Asian and European markets today as both euro and pound came under pressure from domestic economic releases, seeing limited benefit from the rebound in the carry trades which rallied once again as equity indices rose in both regions.
In the Euro-zone the IFO report printed mildly better than expected at 103.9 versus 103.8 but this was the sixth consecutive monthly decline in the survey’s readings indicating that the strong euro is exerting a negative pull on sentiment in the 13 member region. The IFO readings continue to suggest that expansion in the Euro-zone continues at a healthy albeit slower pace. The key question for longer term positional traders is whether the slowdown in the US will drag European growth rates down with it or whether Europe will be able to decouple from the US by generating growth from Asia and Middle East.
Overall, the IFO news confirms our contention that chances of any further rate hikes from the ECB for the rest of the years are minimal at best. Tonight’s German Import Prices did jump to their highest level since April, but at 1.3% year over year rate they hardly represent a serious risk to price pressures in Euro-zone’s largest economy. The euro therefore, slowed its assent against the greenback trading down to 1.4250. With little positive economic news of its own, the EURUSD is very much likely to trade on its old dynamics as the anti-dollar. That does not necessarily mean that the pair cannot set new highs especially if US data continues to show serious slowdown in the economy, but it does mean that euro’s rate of advance may slow from the current meteoric levels.
For now the euro continues to benefit from carry trade flows to the upside, but interestingly enough it has not suffered significant declines whenever risk aversion hits the market. The reason for this divergence, we believe, is the recognition of the new interest rate regime by the market. With yesterday horrid housing data almost assuring a Fed rate cut in October, traders are now anticipating 50bp decline in the Fed funds rate from the current levels by the end of the year. The euro is therefore naturally benefiting from the expected interest rate compression in the pair. For now all eyes will turn to the Durable Goods number to see if it confirms the latest weakness in the US economy.
