Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· JPY Machine Orders much higher than expected
· <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK Visible Trade Balance widens
· CAD Housing starts on tap
· USD Calendar quiet save for Wholesale inventories
The Fed paused at 5.25% and much to the surprise of most market players the EUR/USD dropped after the initial knee jerk spike high selling off nearly 100 points to hit a low of 1.2765 in early <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Asia trade. The halt in the rate tightening cycle was well anticipated by most analysts leading to a skew in positioning ahead of the report. Thus, with so many traders long the EUR/USD, once the news hit the screens the markets produced a classic buy the rumor sell the news dynamic falling through several levels of stops in the EUR/USD pair. By early Europe however, the euro stabilized and recouped almost all of its losses as the implications of the change in Feds policy began to filter through the market.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
As we noted yesterday, having paused yesterday, the Fed is unlikely to reinstate the interest rate hike policy for the rest of the year unless a massive decline in oil prices unexpectedly boosts US growth in the next few months. With US economy slowing to 2.5%-3.0% growth rate, the Fed is intent on engineering a soft landing by making sure that US consumer demand remains vibrant in the face of rising gasoline and housing costs. Whether it succeeds remains to be seen, but the conclusion for the currency market is that the dollar will no longer enjoy the benefit of consistently rising interest rate yields and will now have to compete on US economic performance alone.
In economic news today, UK produced most of the market moving data as the countrys Visible Trade Balance widened greater than expected weighing on the pound. Although UKs deficit with non-EU trading partners improved somewhat to -3.14B from -3.715B the rise in the exchange rate of the pound over the past two months may have slowed export growth which contracted slightly from 22.1B in April to 21.3B in June. Tonight also saw the release of the BOE Quarterly Inflation report which provided a muted view of inflation with the central Bank stating that price level increases should moderate as we move into 2007. The relatively dovish message from the BOE caused the typically quiet EUR/GBP cross to skyrocket by 30 points as traders who bet on the fact that last weeks rate hike from the BOE was the start of a new tightening campaign, began to reconsider their positions. Given this weeks pound bearish data that included the contraction in UK Manufacturing and tonights wider than forecast Trade Balance gap, last weeks surprise rate hike by the BOE is looking increasingly like a one and done maneuver. Should that be the case the EUR/GBP cross may have more room to rally.
