Euro Takes out 2007 Highs

· Yen: Tertiary Industry Index higher on consumer spending
· Euro: Breaks out to 2007 highs
· Swiss Franc: Retail Sales remain strong.
· Dollar: CPI U of M on tap

In a wild and powerful move that started in earlyAsia, the EURUSD rallied above the 1.3300 figure for the first time in 2007 and appeared to be within striking distance of taking out the 1.3348 highs from 2006. There was no one reason for the rally but rather a series of factors that finally pushed the pair over the hurdle higher. Yesterday’s lackluster results from the manufacturing sector which showed very tepid numbers from Philly Fed along the largest month over month decline in Empire Manufacturing readings suggested that the contraction in housing may be creeping into other parts of the US economy. Taken together with Tuesday’s limpid Retails Sales, this weeks US data indicates a clear US economic slowdown that may in the words of some analysts, “become much worse before it becomes better.”

On the European side, the growth story in the region is further boosted by the continued hawkish posture of the ECB. We pointed out yesterday the possible long term euro bullish implications of the rising Labor costs in the Eurozone which are likely to force European monetary authorities to remain vigilant in their fight against inflation and consider further rate hikes in the upcoming months. Overall, however, tonight’s price action can be best attributed to technical factors, as a torrent of stop orders forced upward movement in the pair and the absence of any dollar positive developments, generated further upward momentum with traders trying to push the EURUSD to multi-year highs.

In Japan the economic news was also rather positive with Tertiary Activity index rising 1.6% vs. 1.1% projected on the back of better than expected consumer spending. However, the news was somewhat tempered when Hiroshi Watanabe the nations top currency official stated that the BoJ will be very slow and careful in adjusting interest rates higher going forward. Indeed the central question facing the yen is whether the BOJ will hike rates once more before the June Parliamentary elections which appears increasingly unlikely. If the BOJ stays still, yen weakness, especially against the euro could easily return as carry traders will plow right back into the trade. Even Mr. Watanabe admitted that the past two weeks of turbulence resulted only in the unwinding of short term positions in the carry trade.

Will the dollar bounce back in the US session today? Unless the market sees extraordinarily high CPI or consumer confidence numbers the odds are with the euro. The FX market is notorious for stop hunting and with the EURUSD within a whisker of its 2006 highs, euro bulls will most likely try to stage an assault on the 1.3350 level to take out any remaining weak dollar longs.