JPY Machine Orders plummet -7.4%
EZ French CPI softer
EZ French GDP weak
US Calendar barren
Comments by PBOC Governor Zhuo that the central bank is considering lots of options regarding its inventory of 1 Trillion of dollar reserves continued to reverberate throughout the FX markets tonight as traders made bets that the Chinese will begin to diversify away from their dollar denominated positions. The EUR/USD breached 1.2900 and the pound hit a 19 month high in early European trade. But the anti-dollar rally ran smack dab into negative economic data as both Japanese and European releases badly missed their mark.
In Japan, core machinery orders plunged -7.4% on a month over month basis versus expectations of a 1.8% rise suggesting that the global slowdown in demand in the other G-3 regions is beginning to spread to Japan. The news once again raised questions about BoJ ability to raise rates before the year end, especially coming on the back of yesterdays lackluster bank ending figures. Later in the day Governor Fukuis, mildly hawkish remarks expressing concern over carry trade positions helped cushion yens fall, but his refusal to commit to a hard date on the next rate hike took the starch out of any yen counter rally. Although the market is clearly prepared for the end of the carry trade, until and unless the BoJ actually signals its willingness to raise rates, the carry traders will continue to flock to the USD/JPY pair taking full advantage of the interest rate differentials for the time being.
In Europe meanwhile, euro bulls were stymied by the weak data out of France where GDP stagnated to 0.0% from 0.5% projected while Industrial Production contracted -0.7% versus 1.0% expected gain. The news only confirms the global slowdown theme weve been writing about ad infinitum and clearly puts into doubt any ECB rate hikes beyond the 3.5% target expected by December. With the US consumer the main engine of global demand over the past 3 years retrenching markedly and with neither Japanese nor European consumers willing to pick up the slack a bet on further rounds of tightening from the G-3 central bankers in 2007 appears more and more shaky. If the global economy does head for a slowdown at the start pf 2007, talk of rate cuts rather than rate hikes will begin to preoccupy the markets.
