Talking Points
NZD retail sales flat disappoint
JPY CGPI up to 3.6%
Fukui signals possibility of hike
US Retail Sales tells the story
I cannot rule out the possibility, was all that Governor Fukui had to say in order to send USD/JPY tumbling in the first hour of London trade today when he was queried by reporters about the chances of another rate hike from the BOJ before the year end. The BOJ concluded its two day policy meeting by unanimously maintaining short term rates at 0.25%. However, Governor. Fukuis ever so subtle comments signaled that the Japanese Central Bank may be finally ready to commence a tightening program as the countrys economy continues its strong recovery from decade long bouts with deflation and multiple recessions. With real interest rates still negative in Japan, the BOJ has to move sooner rather than later to curb liquidity and tonights press conference signals that the monetary authorities may be finally ready to address this issue.
Governor Fukui further noted, The best we can say is we will make a decision based on economy and price data. To that end tonights results should be supportive to the tightening view. Domestic CGPI rose to 3.6% year over year level - its highest reading in 25 years. The headline number was more muted due to substantial declines in oil, but the underlying fact is that Japanese producers are finally able to assert some pricing power which means that Japanese monetary policy should become progressively less accommodative as we move towards 2007. In short, tonights news may have been just the type of fundamental boost that the long suffering yen bulls have been waiting for. However, with USD/JPY still hovering dangerously close to the 120.00 level the opportunity to run stops and knock out close to $10 yards worth of option barriers may be too tempting. Nevertheless, with the recent spate of Japanese economic data highly constructive to a more hawkish monetary posture, the rally in USD/JPY appears to be approaching the end.
In US today the marquee event is Advanced Retail Sales. The market is looking for a flat reading from the month prior but the results will be scrutinized closely as this release has become the key battle between the dollar bulls who argue that recent declines in gasoline prices and upward revisions in employment numbers will improve consumer spending and dollar bears who claim that the decline in housing sector and record rise in debt service ratios will weigh heavily on US consumer demand.
