Euro At a Standstill But Price Pressures Remain

Published July 29th, 2008 - 01:30 GMT

Another night of listless trade in EURUSD as the pair remained landlocked ahead of key event risk later in the week.

Talking Points

•    Japanese Yen: Landlocked at 107.50  as equities fall
•    New Zealand Dollar: Hammered by news that New Zealand Guardian Trust suspended payments
•    Euro:  PPI continues to set record highs
•    British Pound: Mortgage approvals lowest since 1999
•    US Dollar: Consumer confidence on tap

Euro At a Standstill But Price Pressures Remain

Another night of listless trade in EURUSD as the pair remained landlocked ahead of key event risk later in the week.  News that Merrill Lynch plans to take yet another write down, this time for $5.7 Billion, weighed on the greenback as worries about systemic integrity of the US financial system continue to linger in the market.  As Mike Shedlock noted, “The market cap of Merrill Lynch is $23.97 billion. Mother Merrill has raised $30 billion since December. It is taking Herculean capital raising efforts to keep the good ship Merrill afloat.”

Yet the safe haven theme in the EURUSD is clearly worn out as the pair saw very little forward progress off the latest announcement. With the market generally inured to most of the bad news from the US financial sector, trading is likely to return its focus to more micro factors as the week continues starting with US GDP tomorrow and NFPs on Friday.

Meanwhile on the economic front French PPI data recorded its highest reading ever indicating that price increases in the EZ show no signs of abating. Nevertheless we do not think that inflationary pressures will force the ECB to raise rates yet again given the fact that consumer confidence in France hit a record low and housing demand slumped to 2002 levels.  Demand is clearly contracting in the EZ and as long as oil stabilizes at these levels the pass through effects of high energy costs should ease  keeping ECB monetary policy in neutral for the rest of the year.  

Finally the kiwi was clobbered in overnight trade when the New Zealand Herald newspaper reported on its Web site that Guardian Trust suspended new investments and withdrawals in one of its funds, citing liquidity issues. The New Zealand dollar has been in a pronounced downtrend over the past months as credit conditions have deteriorated and RBNZ lowered rates for the first time in 5 years. The kiwi often acts as the “canary in the coal mine” for other high yielders and its underperformance suggests that the carry trade may see hard times ahead.

In North America session today the key event risk may prove to be the Consumer Confidence numbers. The surprising jump in U of M may bode well for today’s data and should that be the case the greenback  is likely to see some support, especially if equities respond positively and oil prices remain subdued.

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