Talking Points
JPY False rumors of Fukui resignation whipsaw yen
French Business Confidence slightly below expectations
DEM CPI due 12:00 GMT
USD housing data on tap
The biggest price action in Asia trading tonight was sparked by news that was not true. Speculation that BOJ Governor was resigning pushed USD/JPY above 116.65 early Tokyo trade but the pair quickly dropped 50 points once that rumor was debunked. Governor Fukui, having survived a scandal earlier in the year, remains one of the principal monetary policy makers in the world, viewed by most currency traders as the key architect of Japans steady economic recovery after a decade long battle with deflation. His sudden departure would no doubt create serious uncertainty over the direction of Japanese monetary policy. However, once the rumors were squashed and the excitement died down currencies went back to their routine of the past two weeks, which is namely to do nothing.
With only one minor release on the calendar French Business Confidence which printed at 107 versus 108 expected, the markets had little reason to trade and fell into their familiar stupor. Since the start of the month EUR/USD has traveled a miniscule 200 points in aimless range trading, winding up essentially where it started. The indecision in the price action reflects the markets own confusion about the immediate prospects for the US economy. The central question facing most market players is this: what will have the greater impact on US economic demand the stimulative nature of lower energy prices or the depressive effect of slumping housing market? The fall in gasoline prices to near $2.00/gallon in some areas of the country and the massive decline in natural gas caused by the Amaranth fiasco should act as de facto tax cuts for the US consumer just in time for the critical Christmas shopping season. On the other hand, the falling housing prices and relentlessly rising costs of debt service could chip away at consumer confidence to the point of a sending the US economy into a possible recession by 2007.
With the jury still out as to how the US economy will react, traders will likely focus on todays US Existing House Sales report to gauge the true extent of the problem. Most analysts expect a decline to 6.20 MM units from the 6.33 MM run rate the month prior, but should the data surprise to the upside the greenback may well see a relief rally after the depressing results from the Philly Fed report sent it lower last week.
Finally, as we wrote in our weekly, in the midst of all the hoopla about Philly, most players had already forgotten the woeful TICS report form last Monday which printed at $32.9 Billion vs. $70.0 Billion expected. While some analysts shrugged off the massive shortfall as a non-event, we are not one of them. If this is a start of a nasty new trend the repercussions for the dollar may be severe as a toxic combination of slow growth and lack of financing could seriously hurt the greenback as we approach 2007. For the time being the lack of clarity on the economic front should keep volatility at a minimum as the pair traces out the familiar 1.2700-1.2900 range. While traders grind their teeth in frustration, central bankers must be smiling.
