Talking Points

??? Japanese Yen: IP higher than expected
??? Euro: CPI in line
??? British Pound: At three month high off strong housing and PPI data
??? US Dollar: Retail and TICs on tap

Pound Propels Higher as PPI Stays Hot

The majors all gapped higher at the start of the Asian tonight as traders reacted to the G-7 communiqu?© which did not address yen weakness directly, stating only that currencies should reflect their ???fundamentals???. The policymakers refusal to tackle the issue of yen carry trades, left the currency wide open to further sales and it reached yet another record low against the euro in early Asian trade as EURJPY hit 162.45. On the economic front the yen actually saw some positive news as Industrial Production data printed at 0.7% vs. ??“0.2% expected. The news confirmed BOJ??™s view that the manufacturing sector continues to expand moderately, but it offered no solace to downtrodden yen bulls since the market is convinced that Japanese interest rates will remain stationary through the end of Q2, providing ample positive carry to all the yen shorts. In fact it appears that the only event that could stop the one way price action in the carry trade will be another bout of risk aversion. Therefore, traders who are trying to time the turn in USDJPY may want to look at Chinese and US equity markets for possible clues of a reversal.

Meanwhile, the main trading story of the night revolved around cable, as UK housing and inflation data both surprised to the upside. The Rightmove House prices survey rose 15% on year over year basis while the DCLG report showed a 12.1% jump. Furthermore, UK PPI printed hotter than expected with the core output component rising to 2.9% on year over year basis. If UK CPI and Retail Sales data show the same type of strength later on this week, it will become increasingly likely that the BOE will hike rates in May, as double digit gains in housing and higher energy costs are clearly putting upward pressure on prices. With pound now within striking distance of the 2.0000 level any negative economic news out of the US may push the pair through that barrier later on today on sheer momentum.

Today??™s US calendar focus will rest squarely on Retail Sales. A healthy rebound in Retail Sales is be critical for dollar longs in order to stem the tide of negative sentiment bearing down on the greenback. The market is becoming more and more certain that the slowdown in housing along with rise in gasoline is beginning to negatively impact US consumer spending which comprises more than 70% of US GDP. Therefore, today??™s report will be scrutinized not only for its headline number but also for its Retail-ex gasoline value to determine the truth strength of the bounce in consumer demand.