JPY Fukui remains dovish
CHF SECO forecasts 2007 GDP at 1.7%
EUR IFO blows out the reading highest this decade
USD PPI on tap
The IFO survey blew past expectations tonight printing at 108.7 versus 106.8 projected and catapulted the EUR/USD to its highest level of the week. Most impressive of all was the sharp rise in future expectations which jumped to 102.5 from 100.0 indicating that the German business confidence has improved markedly despite the possibly depressive consequences of the VAT tax increase due to go into effect early next year. As we noted yesterday, the German export sector has managed to remain extraordinarily competitive in the face of higher exchange rates, in no small part due to strong containment of labor wages. If German industry can maintain this rate of growth in 2007, the famed decoupling scenario put forth by euro bulls whereby the EZ economy continues to expand in spite of a contraction in US demand, may well materialize. If this were to be the case the EUR/USD pair could challenge its all time highs above the 1.3600 level as markets will make further adjustments with compression of interest rate differentials.
In the meantime, no smiles in Tokyo as the BOJ Monetary Policy committee just completed its meeting and left the headline assessment of current conditions unchanged, saying "Japan's economy is expanding moderately." The central bank did not change the assessment of the economic outlook as well, noting that "Japan's economy is expected to continue expanding moderately." Yesterday we stated that if Japans central bank disappoints the market by issuing a neutral assessment of the economic situation and offers little forward guidance to the market, yen bears could once again reassert their control over the unit and the recent multi-year lows set against both the euro and the pound may not be the last. That is indeed what happened as Governor Fukui conceded in a post meeting press conference that Japanese consumption remained weak which in turn prevented him from making any prognostications regarding the timing of any future rate hikes. Tonights BoJ action leaves the yen stuck in a rut with no immediate fundamental reason to buy the unit. Looking ahead on the Japanese calendar only the CPI data and Retail Trade numbers could turn the tide for yen bulls if they reveal that the strength in the Japanese corporate sector is beginning to positively impact consumption. For time being however, the yen continues to flounder as it heads for new lows against the euro.
