The IFO survey printed slightly below expectations matching the same reading as last month which was just a whisker below the record highs of 108.7
[B]- Japanese Yen: Trade data mixed export slow
- Euro: IFO same as last month
- Pound: Total business investment slows markedly
- Dollar: Durable Goods and New Homes Sales on tap[/B]
Strong IFO Fails to Rally the Euro, Yen Rises as Shanghai Falls
The IFO survey printed slightly below expectations matching the same reading as last month which was just a whisker below the record highs of 108.7 set in December of 2006. The Current Assessment component was a bit lower than forecast at 112.5 vs. 113.5 as high energy costs and lackluster domestic demand tempered business enthusiasm. Overall however, the number continues to point to very healthy growth in the Euro-zone, as the high exchange rates appear to have little negative impact on European manufacturers.
Nevertheless, the EURUSD itself sold off a bit going into the number and stayed at session lows after the news was released as traders had hoped for stronger results that would convince the ECB to raise rates beyond the 4% level expected to be set in June. As it stands now, the IFO data shows no signs of overheating in the Euro-zone economy and provides ECB with ample time to consider the next policy tightening move. Going forward market attention is likely to turn away from the European manufacturing sector and instead focus on the EZ consumer especially the Germans.
Hampered by a near 30% increase in VAT at the start of this year, German consumer spending has been the weak link in the region?s economic recovery. German Retail Sales have consistently missed their mark over the past few months and that dynamic was reflected in today?s German GDP data which showed a sharp -1.4% decline in Private Consumption. The negative consumption news was offset by better than expected business investment flows, but until and unless the German consumer demand picks up markedly, the ECB is unlikely to raise rates beyond the 4% barrier. The EURUSD therefore continues to flounder in the 1.3400-1.3650 range as European data alone is not powerful enough to push the pair higher. Only a further deterioration in US fundamentals will make the euro bullish scenario of 1.3700 or higher come true.
Meanwhile, in Asia Pacific, the yen finally saw some relief with USDJPY trading down to 121.30 by the open of the London session. Japanese Trade data showed mixed results with the Merchandise Trade Balance missing expectations but the Adjusted figure beating them. Japan?s exports to US actually fell for the first time in two years, as the slowdown in US consumer demand is clearly translating into weaker sales with Japan?s second largest trading partner. However, the decline with the US trade was offset by strong growth in both Asian and European markets and suggests that Japan is not longer vulnerable to a slump in US consumption as its export portfolio becomes increasingly more diversified across global markets.
Nevertheless, despite the relatively healthy fundamentals, yen?s true strength came from the return of risk aversion as both the Nikkei and more importantly the Shanghai markets sold off today. The decline in the Shanghai shares may have been triggered by comments from Alan Greenspan who predicted a “dramatic contraction” in Chinese shares prices that could spread to other markets. However, the reaction of the Chinese markets to this cautionary rhetoric was mild at best and unless the selling in Shanghai accelerates, yen gains are likely to be limited.
