NEWS / Foreign Exchange

Euro Retakes 1.3600 and May Gun For All Time Highs

Talking Points

??? Japanese Yen: Data mixed, but Fukui slightly hawkish
??? Euro: Retail PMI shows consumer strength
??? Swiss Franc: KOF fails expectations
??? US Dollar: GDP is key

Euro Retakes 1.3600 and May Gun For All Time Highs

Despite extremely mixed economic data and yet another neutral monetary policy decision by the BOJ, the yen held its own in overnight trade as USDJPY receded from the 120.00 level to settle at 119.50 in early European trade. The Japanese data disappointed on many fronts, as CPI, Overall Household Spending and Industrial Production all missed their mark. Overall Household spending did achieve a third straight month of positive readings, albeit just barely as the report climbed only 0.1% versus 0.7% expected. At the same time Japan also saw weakness amongst producers as Industrial production contracted sharply to -0.6% from 0.9% expected on a correction in IT inventories. Nevertheless, the currency received a boost from post BOJ meeting news conference, with Governor Fukui stating that future rate hikes were not necessarily dependent on rising price levels.

Governor Fukui noted that the BOJ rate policy was not predetermined adding that the central bank may decide to raise rates even of the price level increases lag the growth of the overall economy. Although the BOJ chief reiterated his previous comments that any rate hikes will be gradual, Japanese authorities appear to be signaling to the market that they are uncomfortable with the one way action of the carry trade which has pushed the USDJPY exchange rate to near 120. Therefore with BOJ now fully confident that Japan's recovery is sustainable, today's commentary to the market suggests that the monetary policymakers may begin shifting their attention to exchange rates levels and will act accordingly if yen weakness continues much past the 120.00 barrier.

Meanwhile more good news from euro bulls as Euro-zone Retail PMI numbers printed at a very healthy 54.6 versus 53.8 the month prior. Activity improved markedly in both Germany and France but Italy??™s numbers dropped below the 50 boom/bust line. Euro-zone growth continues to outpace that of the US and today??™s data will only serve to reinforce the decoupling scenario that has been the backbone of euro bullishness over the past several months.

Today??™s US GDP data is due at 8:30 and expectations have been so diminished (from 2.5% to 1.8%), that as our colleague Kathy Lien wrote yesterday, ???We actually think the data could be a bit better since consumer spending, which accounts for 70 percent of GDP only worsened slightly in the first quarter. Retail sales in the first three months of the year averaged 0.6 percent, compared to average sales of 0.7 percent in the last three months of 2006. ??? However, if the US data fails to meet even these modest forecasts the EURUSD could easily catapult past its all time highs as the dichotomy between the economic fortunes of EZ and US becomes even more pronounced.