Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· Aussie Trade Balance improves are exports grow
· German Unemployment contract materially
· EZ Inflation jumps 2.5% year over year
· <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US Chicago PMI only data point on calendar
The euro suffered from seesaw action in early European trade today first rising to 1.2900 on the back of better than expected German unemployment data but the unit then retraced much of its gains as the traders booked profits from two days of sustained gains. German unemployment declined by much greater than expected -93K versus consensus of -20K with unemployment rate slipping to 11% from 11.3% the month prior its lowest rate in 17 months. Additionally Euro-zone CPI ratcheted to 2.5% a bit stringer than expectations of 2.4% and materially higher than then 2% ECB target. With better than expected reduction in unemployment and continually improving sentiment gauges (EZ Business Climate Indicator climbed to 1.06 from 1.00 the month prior), the ECB is free of political and economic pressures to tighten monetary policy and the June rate hike now appears a foregone conclusion.
However, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />further progress in the EUR/USD is unlikely to come from additional European data, but rather from the upcoming US economic releases. The key question going forward vis a vis the direction of EUR/USD trade will not be; is the EZ economy strengthening but rather is the US economy weakening? Therefore this Fridays US Non- Farm payrolls report looms even larger than usual and may be the trigger that catapults the pair above the 1.3000 level if the data prints materially worse than expected.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Yesterday we noted that typically US Treasury Secretaries from the financial sector are viewed as dollar bullish by the FX market. But HankPaulson, former chairman of Goldman Sachs and President. Bushs nominee for the post, may be an exception to the rule. Mr.Paulson has extensive experience with Chinese business and political leaders and is therefore eminently more capable in nudging the Chinese towards a more flexible exchange rate regime for the yuan than former Treasury Secretary Snow. In fact, overnight PBOC already stated that it would take innovative steps to bring its Balance of Payments surplus into equilibrium and would press ahead with making the yuan convertible a move that ironically enough would likely be negative for the dollar as investors and speculators would be free to bid up to the yuan relative to the greenback. The indirect beneficiary of such scenario would of course be the Japanese yen which often acts as a yuan proxy in the FX markets.
