[B]Talking Points[/B]
• Japanese Yen: Takes out 112.00 on risk aversion
• New Zealand Dollar: Record high interest rates lead housing sales to plunge
• Pound: Consolidates Gains Near 2.11
• Euro: Range bound near 1.47 on mixed EU Growth, Inflation Forecasts
• US Dollar: Will import prices provide mild fundamental support?
Both EUR/USD and GBP/USD held to 50 point ranges overnight, as minimal news flow left the pairs to consolidate yesterday’s gains. However, there was a marked pullback in carry trades like USD/JPY, GBP/JPY, and AUD/JPY as the Nikkei closed down 1 percent – the sixth straight losing day – on reports that Mizuho Securities may have lost as much as 100 billion yen as a result of the problems in the US subprime mortgage market. As if it wasn’t already clear before, the contagion of the US housing market collapse has the potential to spread not only throughout the US economy, but also into global financial markets as we’ve already seen exemplified in the UK with Northern Rock. Japan was previously thought to be relatively shielded from subprime risk, but evidence is starting to indicate otherwise.
Meanwhile, economic data out of the Euro-zone proved to be fairly lackluster. The European Union raised the 2008 inflation forecast for the region to 2.1 percent from 1.9 percent, reiterating ECB President Trichet’s comments that upside inflation risks remain. However, the outlook for 2008 GDP was revised lower to 2.2 percent from 2.5 percent, all of which suggests that the central bank has very little room to maneuver in monetary policy as raising interest rates further will be very much to the detriment of expansion. The oft-forgotten Swissie also benefited from the drop in carry trades overnight as well as the release of the SECO Consumer Climate index. The quarterly release was stronger than expected at 15 as tight labor market conditions offset the woes of the financial markets as domestic sentiment remains positive. Indeed, while the Swiss franc has appreciated quite a bit against the US dollar, the currency has actually depreciated against the Euro over the past year. The Euro-zone is by and large Switzerland’s biggest trade partner, so this has helped fuel export demand along with the rampant hiring witnessed over the past year. The EUR/CHF price action has also fueled upside import inflation risks for the economy, and given these buoyant conditions, the Swiss National Bank is likely to continue with their rate normalization cycle in December.
This morning, traders await US import price inflation data for the month of October, and given the broad weakness of the greenback along with a surge in commodities during the reporting period, the index is anticipated to jump. However, it remains to be seen if the markets can be convinced that the Fed may leave rates steady in December in order to respect their price stability mandate, or if they will continue to sell off the dollar and price in a 25bp cut in the hopes of staving off a recession and crash in the US equity markets.
