Talking Points
JPY Department Store Sales slip for 5th consecutive month
French NFP data stronger than projected
UK Public Finance Gap widens -10.5B vs. -8.4B
US U of M data on tap
The FX markets version of watching paint dry was in full display in Asian and European sessions tonight as euro, yen and pound bounced in 30 point ranges of listless, directionless trading. Little news flow and the absence of many market participants as dealing desks the world over empty for the beaches of Hamptons and the waters of St. Tropez have created a standstill in most majors which is quite likely to continue this range bound behavior into next week.
In overnight news French non-Farm payrolls expanded at 0.3% versus 0.2% forecast but wage growth slowed in Q2 to 0.5% from 0.8% reading in Q1. The French wage data is consistent with the latest CPI releases from the Eurozone which suggest that while Producer prices continue to move relentlessly higher, pricing power in the 12 member region remains decidedly weak. The contrast between input costs and output prices should raise questions amongst euro longs regarding the probability of continued rate hikes from the ECB. While we doubt the European monetary authorities will flat our pause in their tightening campaign, they may choose to slow the pace of rate hikes perhaps ratcheting rates only to 3.25% rather than 3.50% by year end.
One key factor that may influence ECB officials decision making process is the price action in EUR/JPY which reached all time highs in early European trade tonight coming to within a whisker of the 149.00 figure. Although the pair appears to have made a short term climax high, dropping 70 points soon thereafter, the long term implications of such high exchange rates clearly have to be a concern to EZ policy makers especially in light of the fact that exports are such a critical contributor to overall economic growth of the region. Last May, ECB much to the surprise of the market chose to hold rates steady resulting in a sharp sell off in EUR/USD. At the time, many analysts believed that the high rate of EUR/JPY was the true reason for the monetary policymakers hesitancy to raise rates. With EUR/JPY now trading nearly 300 points higher, traders would be well advised to watch this dynamic with care as it may suggest that further euro rate hikes are not nearly as certain as most market players believe.
