daily brief

Dollar Yen Approaches 108 as Nikkei Skyrockets – But Danger Ahead in US

Friday, 25 January 2008 09:33:43 GMT  |  Boris Schlossberg, Senior Currency Strategist

Talking Points

•    Japanese Yen: Propels to nearly 108 as Nikkei has biggest rise in months
•    Euro: Bid all the way to 4780 but consumer data disappoints
•    British Pound: Trades off the 198.00 level after bank calls for 125bp of easing in 2008
•    Canadian Dollar: CPI data on tap
•    US Dollar: No data today

Risk appetite returned with a vengeance in the currency market tonight as Nikkei skyrocketed by more than 500 points helping to propel USDJPY to within 10 points of the 108 level.  Investors in Asia were encouraged by the rebound in equity prices in Europe and US over the past two days after the Fed’s emergency inter-meeting rate cut of 75bp on Tuesday.

With little key data on the economic calendar this week currency markets have been trading in tandem with the equities. Carry trades fell when equities crashed and rose when stock rebounded tracing out rollercoaster price action all week long.  The economic picture remains unclear as traders still debate whether US  will enter a full blown recession or merely experience a temporary slowdown. Yesterday’s weekly jobless claims were encouraging printing at 301k well below our threshold of 350K and indicate that at least for the moment the labor markets are not seeing any material deterioration in demand.

On the economic front the European data was mixed today with German consumer confidence printing better than forecast at 4.5 vs. 4.3 but nevertheless hitting a 2 year low while Italian Retail sales slipped into negative territory registering a contraction of -0.3% on a month over month basis. The negative effects of the global credit crunch are slowly seeping into the real economy in the Euro-zone and should turbulence persist, consumer demand  may weaken significantly,  undermining ECB’s hawkish outlook. For the time being however, European monetary authorities continue to err on the side of inflation maintaining a restrictive policy.

With no US economic data on the docket currency markets will look to equities to set the tone once again and today’s early gains in the carry trades and the high yielders could come under pressure if US stocks sell off. After two strong days of gains, equity traders may run into the case of buyer remorse, choosing to take their profits ahead  of the weekend. Should stocks falter expect the EURUSD and GBPUSD to do the same as risk aversion/risk assumption remains the only game in town.
 
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: bschlossberg@fxcm.com

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