€ IFO Rocks the Euro
¥ Contained by ZIRP
₤ Bad News Pound
₣ Good Not Great for Franc
Handicapping a Slowdown
Juts like last week and the week before that the EUR/USD saw a reversal with whipsaw action once again frustrating the breakout players on either end of the 1.2200-1.2000 range. Note however, that despit ethe choppiness the pair has made seies of higher lows over tha past mont suggesting that the underlying bias in the FX market appears to be favoring the euro. The FX market is beginning to handicap a slowdown in US growth and to that end the shortfall in Personal Income figures which printed 0.4% vs. 0.7% expecetd and the stagnant Personal Spending figures released on Friday which saw no gain at all versus 0.0% projected all contributed to the dollar bear’s argument that the salad days of US economic growth may be over. Thus, neither the Fed hike to 4.75% nor the strong Chicago PMI numbers could sway the market to get long dollars as traders looked to the future with foreboding.
Next week the bears thesis will be either confirmed or refuted as the most important report of the month will be released on Friday. The Non-Farm payrolls, as always will have a very strong impact on the market shold they exceed or fail expecations. We have long argued that 200K new jobs is the key metric for the growth of the US economy and the health of the greenback. If the NFP’s print within or above that number, the dollar may well firm as assumptions about the end of Fed rate hike campaign will have to be recalibrated. On the other hand should the NFP’s disappoint that result coulod serve as catalyst to a EUR/USD breakout out of the current tight range as the idea of a US economic slowdown will becoime closer to reality.
IFO Rocks the Euro
The biggest economic surprise of the week occurred on Tuesday night when the IFO report blew away market estimates printing at 105.4 versus far more modest expecations of 102.9. The reading reached a 15 year high and infused euro bulls with ocnfidence as it validated the idea of an acceleratedrecovery in the 12 member region. Euro was further boosted by news that German unemployment slipped below the 5 million mark for the first time this year. But not all EZ data was positive. Most notably German Retail Sales slipped –0.6% although the decline was off a large gain the month prior so that market shrugged off the results.
Next week attention turns to PMI Mancufacturing and PMI Service reports at the beginning of the week as traders look for confirmation of a pick in EZ economic activity. Both reports are exoecetd to print well above the 50 boom/bust line but a significant miss below that range could trip up the signle currency as market players will suddenly question the sustainbality of the EZ recovery. However as we move into the later half of the week, the imprtionace of EZ data will recede and the euro will once again take on its familiar role as the anti-dollar, with all eyes turned to the NFP report. A combination of strong EZ data and weak US results may finally start an unptred in the pair, but should the results come in mixed the market confusion of the past month exemplified by the choppy price action will likely continuew for a while longer.
Contained by ZIRP
Trading in the yen was decidedly more contained tnan the rest of the majors as the unit registed a very small 20 basis point decline despite relatively buoyant Jaoanese data. Japanese jobeless rate decreased even further from 4.4% to 4.1% while Retail Trade improved by 1.0% versus 0.8% expected. The news all served to confirm the thesis that the world’s second largest economy was firing on all cylinders. Yet, yen bulls were stymied by the uncertainly surrounding the lifting of the Zero Interest rate Policy. Recent statements by both monetary and fiscal authorities have suggested that the ZIRP is likely to stay in place well into the fall of 2006 and that news helped to prop up USD/JPY as carry trade speculators continued to stay in the pair harversting the 475bp interest rate differential.
Next week Japanese calendar is very heavily front weighted with the important Tankan survey results released on Monday. The market is looking for continued improvement so any upside surprises may have a limited impact on the pair. Howevunexpected miss could push the USD/JPY above the 118 and even the 119 figures as yen bulls could find themselves squeezed by the relentless carry traders.
Bad News Pound
We’ve been harping for months about the relative underprfomance of the UK economy and this week the economic data really sealed cable’s fate as the unit posted the worst perfomance againt the greenback amongst all the majors dropping 34 basis points. The key event that crushed any bull momentum for the pound was Wednesday’s massive Current Account gap which expanded by –11 Billion GBP versus expectations of only a –6.8 Billion GBP deficit. As we noted in our note after the news hit the wires, the massive red ink from the Current Account deficit may prevent the BOE from lowering rates which in turn could tio the UK economy into a recession. Last week’s dour news which in addition to the CA gap included very soft consumer confidence numbers and very poor Distributive Trades results combined with the fact that the pound was negative carry to the dollat for the first time in more than 6 years weighed heavy on the unit. Little wonder that the EUR/GBP cross was headed straight for 7000 as traders favor the interest rate and eco growth story of the EZ.
Next week PMI Manufacting and Services take center stage followed by the Industrial Production and Manufacturing Prodution data. If data shows further weakness, most notably if PMI Manufcaturing slips below the 50 boom/bust level pounds troubles may far from over.
Good Not Great for Franc
Swiss economic performance continued to demonstrate very healthy results with Retail Sales jumping 3.1% versus 2.3% on a year over year basis while UBS Consumption Indicator skyrocketed to 1.39 from 0.40 the period prior. Only KOF came in a tad bit softer that expected but at 130 - its second best reading in XX years – it hardly painted a pictire of a slowing economy. The Swissie did indeed respond to the numbers rising 58 basis points on the week. However, the unit still lagged the euro albeit by only 10 basis points as the more hawkish ineterst rate posture of the ECB continued to dominate trade. With Switzerland running both budget and Current Acount surpluses the SNB is no hurry to match ECB’s aggressive tightening policy. Therefore the Swissie will only gain on the euro if the later trips on its own news. With Italian elections coming up and the French students still in protest mode the turn in the EUR/CHF may come sooner rather than later, but for now the euro bulls hold all the cards
Next week the CPI report will the marquee economic event for the franc. If inflation shows a sudden accelaration, the generallt hawkish SNB nmay be forced tpo consider rate hikes far more seriously which will drive speculative flow into the franc. If on the other hand inflation remains contained, the good ecocnmic news by itself will not move the franc higher.