Japanese Yen: loses ground as Tankan shows some slowdown
Australian Dollar: Retail Sales remain strong hinting at possible hike from RBA
Euro: Manufacturing demand slows across the region
US Dollar: Awaiting ISM Manufacturing
Yen and Euro Sold as Manufacturing Slows But Upcoming US Data is Key
Both yen and euro were mildly weaker through early European trade as manufacturing data in the two regions showed a marked slowdown. In Japan, the Tankan Manufactures survey missed estimates printing at 23 vs. 24 expected, but the service sector suggested some underlying strength as it beat forecasts with a reading of 23 vs. 22 projected. The Japanese economic growth may be starting to rotate away from producers to consumers as demand for services finally picks up pace. As we suggested last Friday, the better than expected results in Overall Household Spending may have been the first sign that the Japanese recovery, which up to this point has primarily benefited businesses, is broadening out to consumers.
Overall however, tonights data offered little evidence to contradict the consensus view that BOJ remain neutral well through the end of the summer. Therefore the yen continued to weaken on carry trade flow especially against the Australian dollar and the British pound where speculation is rife that both central banks will hike rates further within the next two months. The Australian data was especially impressive as Retail Sales rose 0.9% vs. 0.4% projected. Over the past year the Australian economy has generated more than 300,000 jobs and that rise in employment is clearly translating into strong consumer spending. Although Australian rates are presently the second highest in industrialized world, they do not appear to be much of a hindrance to overall growth and indicate that RBA may consider another hike if not in April then possibly in May.
Meanwhile, the euro sold off slightly as EZ PMI Manufacturing data showed a slight decrease to 55.4 from 55.7 expected. The data was weaker across the board as Germany, France and Italy all suffered declines. Although the index remains well above expansionary levels. tonights news suggests that higher exchange rates and higher energy costs may be starting to have an impact on production. Over the week-end executives from the European auto industry stated that the present exchange rate regime provides Asian manufactures with as much as 3,000 dollar cost advantage. With a highly nationalist campaign for President in France in full bloom this theme may begin to resonate with EZ voters and could potentially put political pressure on ECB to curtail their tightening activities. However, for now the data remains strong enough to allow the EC monetary authorities to operate without hindrance and another 25bp hike to take rates to 4.00% by May appears quite likely.