Euro Stymied by 1.2900 Level

However, further progress in the EUR/USD is unlikely to come from additional European data, but rather from the upcoming US economic releases. The key question going forward vis a vis  the direction of EUR/USD trade will not be;  is the EZ economy strengthening but rather is the US economy weakening? Therefore this Friday’s US Non- Farm payrolls report looms even larger than usual and may be the trigger that catapults the pair above the 1.3000 level if the data prints materially worse than expected.

Yesterday we noted that typically US Treasury Secretaries from the financial sector are viewed as dollar bullish by the FX market.  But Hank Paulson, former chairman of Goldman Sachs and President. Bush’s nominee for the post, may be an exception to the rule. Mr. Paulson has extensive experience with Chinese business and political leaders and is therefore eminently more capable in nudging the Chinese towards a more flexible exchange rate regime for the yuan than former  Treasury Secretary Snow. In fact, overnight PBOC already stated that it would take innovative steps to bring its Balance of Payments surplus into equilibrium and would press ahead with making the yuan convertible – a move that ironically enough would likely be negative for the dollar as investors and speculators would be free to bid up to the yuan relative to the greenback. The indirect beneficiary of such scenario would of course be the Japanese yen which often acts as a yuan proxy in the FX markets.