NEWS / Foreign Exchange

Euro ??“ Industrial Orders Plunge - Will IFO Follow?

Talking Points

??? Australian Dollar: CPI colder just like PPI

??? Japanese Yen: March CSPI at 0.6% y/y matching 9 year highs

??? Euro: Industrial Orders tumble

??? US Dollar: Existing Home Sales and Consumer Confidence is next

Euro ??“ Industrial Orders Plunge - Will IFO Follow?

Euro-zone New Industrial Orders plunged -0.7% versus expectations of an increase of 1.0%. Although the currency showed no negative reaction to the release, the results must be a concern for euro bulls, as they clearly show the drag of rising currency exchange rates on Euro-zone manufacturing and suggest that ECB may have difficulty hiking rates past the expected 4% level in June.

Last week we noted that the first signs of a possible slowdown in EZ production appeared in the Italian manufacturing data. Today??™s decline in the region??™s overall industrial demand confirms that negative trend. The soft numbers from the industrial new orders report therefore put into question the market??™s rather optimistic assessment of the IFO survey due tomorrow at 8:00 GMT. Analysts predict a reading of 107.9 - higher than the prior months 107.7 - and within decade long highs of 108.7 set in December of 2006.

Granted Germany is by far the most efficient and productive economy among the Big Three in Europe, but the country??™s manufactures are nevertheless subject to negative effects of currency valuation just like everyone else. Given euro??™s relentless rise against the greenback, Germany??™s export dependent manufacturing sector may be feeling the competitive pressures of higher exchange rates. This pain may be most evident in Germany??™s important new trade with China as the EURCNY rate has uninterruptedly climbed from 10.0000 at the start of the year to 10.5000 presently. In short, the market may be mispricing the risk of a downward surprise in the IFO given the rather material slowdown in the growth of the Euro-zone Industrial sector.

The yen meanwhile continued to tread water as it remained range bound between 118.25-118.75. News that March CSPI index remained near 9 year highs at 0.6% suggesting that pricing power may be finally returning to the country??™s service sector, had only a fleeting impact on trade.

Although the currency could see further positive event risk as the week progresses its questionable if it will be able to sustain a rally. Up to now, any sell offs in USDJPY remain shallow as carry traders continue to buy the pair on any pullback. With the DJIA still hovering near all time highs, the pair is unlikely to see much weakness given the placid attitude of most investors. However, should stocks sell off while Japanese consumption and employment data print positive, USDJPY could break the 118.00 support level later in the week. For now however, the impact of any positive economic news is minimal at best.