Talking Points
• Japanese Yen: Inflation Risks Growing
• New Zealand Dollar: Housing Fall Further
• Euro: Fails To Retake 1.5850
• Pound: Consolidating On Balanced Comments From BoE
• US Dollar: U of M on Tap
A relatively empty economic docket saw the German wholesale price index rise 1.6% in March, the highest in 2 1/2 years. The inflation gauge far exceeded the 6.0% that experts were predicting. The data reinforced the ECB’s decision to leave rates unchanged, and saw Euro bulls take the pair from 1.5775 to just failing to retake 1.5850. Inflation also showed up in Japan as the domestic corporate goods price index rose 0.5%, its fastest pace in 27 years. Meanwhile the New Zealand housing market continues to be pressured by record interest rates as house sales fell 53.3%.
Euro bulls tried to regain momentum after the testimony from ECB President Trichet erased the gains that led up to the yesterday’s rate decision. After, establishing a fresh all time high of 1.5915, many felt that the possibility of breaking 1.60 after the central bank left rates unchanged was a foregone conclusion. Despite the majority of Trichet’s comments being his usual rhetoric, his reference to the “deplorable’ FX volatility led to a dramatic reversal below 1.5750. The comment ignited fears that the upcoming G-7 meetings may center on efforts to restore the dollars strength which would put an end to the Euro’s momentous run.
Most of the dollar crosses have started to consolidate ahead of the G-7 meetings as a number of initiates to restore stability to the financial system will be bantered about. Monetary leaders are expected to weigh a number of ideas to provide additional liquidity to the markets and create measures to prevent recent problems from repeating in the future. New BoJ governor Shirakawa is expected to steer the talks toward restoring the dollar’s strength, as his country has been negatively impacted by its recent depreciation. However, don’t expect the U.S. and European countries to support those efforts, as Kathy Lien wrote in Why G-7 meetings matter.
The surprising price action for the overnight session may have been the Pound’s ability to stay firm on the back of a quarter point rate cut. The BoE’s subsequent comments have left traders frozen. The MPC recognized the mounting downside risk to the economy, but cautioned that inflation remained a priority. The mixed statement demonstrates the balancing act that the central bank has been doing the past few months. They have remained in between the Fed’s aggressive nature and the ECB’s precautionary stance.
The only event risk that may shake currency pairs from their current sedated states is the U of M confidence survey. The American consumer has been battered by a housing, slump, tight credit markets, a falling stock market and large job losses. Expectations are that their confidence will continue to wane, which should put downward pressure on the dollar. However, an unexpected rebound may spark a dollar bull rally, as traders believe that you don’t bet against the American consumer for too long. Any expectation that consumers may accelerate their spending habits will go a lot further than anything that may come out of the G-7 meetings to restoring the dollar strength.
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