NEWS / Foreign Exchange

Euro Can??™t Make it to the Highs- Correction Coming?

Talking Points

??? Japanese Yen: Stagnant though All industry improves
??? Euro: French consumption shows strength
??? British Pound: UK Retail Sales disappoint slightly
??? CAD Dollar: Retail Sales in Tap

Euro Can??™t Make it to the Highs- Correction Coming?

The euro raced to a high if 1.3636 in early European trade on the back of better than expected French Consumer spending data, but failed to hold those levels and came back to 1.3600 by the start of the New York session. The French data which printed at 0.7% vs. 0.3% forecast suggested that the expansion in the sector remains at a healthy pace as better economic growth and improving employment picture have boosted consumer confidence in the region??™s second largest economy. But despite generally strong economic reports from the Euro-zone this week the price action in the pair is looking tired. ECB officials are clearly concerned with the appreciation of the currency and will most probably delay the next rate hike to June rather than May meeting. As the currency market begins to absorb the fact that immediate yield gains are not forthcoming, the unit could come under profit taking pressure from short term speculative accounts.

In Japan, the All Industry Activity Index jumped to 0.9% from -0.3% project rising for the first time since October of 2006. Almost every sector showed a material improvement from the month prior suggesting that the Japanese economic recover is broadening in scope. The positive news however had little effect on the yen which spent most of the night centered around the 118.70 level as carry trade demand continued to exert some mild downward pressure. With equity markets in China and US staging a massive recovery rally yesterday, the theme of risk aversion has once again disappeared from the landscape and the yen has reverted to trading on yield differentials. Should equity markets wobble once more, yen strength could quickly return.

Finally in London the pound saw a minor downdraft when UK Retail Sales failed to meet the heightened expectations of the market. The numbers printed at 0.3% vs. 0.5% consensus, triggering an instant knee jerk sell-off to 1.9990. However, once traders looked more carefully at the data, the upward revisions of the month prior, brought buyers right back into the currency and pound found support at the 2.0000 level. Given this week??™s UK inflation, employment and retail sales data a BoE rate hike of 25bp in May is practically assured, but just like the ECB the UK central bank is likely to be quite cautious about tightening monetary policy further right away. Thus, although the UK economy clearly shows the best fundamentals amongst the majors, the pound is also vulnerable to a correction as markets??™ bullish expectations align themselves with a more circumspect reality .