Talking Points
• Japanese Yen: holiday in Japan but weak equities help firm up the yen
• Australian Dollar; PPI misses but anti dollar flows help
• Euro: Oil rebounds and helps euro crawl towards 1.5900
• British Pound: Rightmove and dovish Blanchflower drag on sterling
• US Dollar: LEI and BOA earnings on tap
The very familiar “macro merry go around” of higher oil, lower equities and higher euro continued to play out as a new week of trading commenced in the currency markets. The failure to make progress on the Geneva nuclear talks with Iran over the week-end provoked fears of fresh sanctions against the Islamic regime and helped push oil higher, stocks lower and rallied the EURUSD in the process. The pair hit 1.5900 in early European trade as once again currency traders flocked to the euro on safe haven concerns.
If macro themes continue to dominate trade this week the EURUSD could make another run at the key 1.60 barrier, but as the calendar unfolds the unit could become progressively more vulnerable to micro factors, most notably the IFO report due Thursday night. As we stated in our weekly, “If the IFO reading prints … below the psychologically key 100 level the sell of in EURUSD could accelerate as the focus will shift away from the unit status as the pre-eminent anti-dollar instrument back to concerns over its yield.”
Adding further obstacles to any meaningful EURUSD rally was a report today in FT which described plans by French President Nicolas Sarkozy to boost political accountability of the ECB. Specifically Mr. Sarkozy wanted the ECB to publish the minutes of it meeting – a measure that could derail its independence by making national representatives who sit on the board of the central bank vulnerable to political pressure.
While Mr. Sarkozy’s proposals have virtually no chance of being enacted any time soon, his rhetoric reflects the growing unease amongst Eurozone fiscal authorities with ECB’s uber hawkish monetary policy as the overall economy begins to show signs of serious deceleration in growth. Therefore the conflict within the 15 member union may keep the ECB stationary for the rest of the year, even if inflationary pressures do not abate. This scenario is will become even more likely if the labor markets in the region which have been surprisingly resilient begin to contract.
In short another run at 1.60 is quite possible but we doubt the EURUSD may muster much momentum beyond that point unless systemic risk in the US continues to escalate. To that end today’s Bank of America earnings will be of key interest to currency traders as they remain focused on the state of the US financial sector. Friday’s better than expected results from Citibank helped the buck to move away from the 1.6000 figure, but if BOA news is negative it may return there once again.
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