Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· JPY consolidates post BoJ
· EUR Italian Industrial Orders still lag
· GBP Retail beats but mortgages weaken
· USD U of M only report on tap
After a tumultuous day yesterday following the BoJ decision to keep rates on hold, the currency market spend most of the night marking time as traders digested the news flow and prices consolidated in tight ranges. Many analysts have criticized the BoJ for caving in to political pressure, but the fact of the matter is that <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Japanese fundamentals provided little support for further tightening at this times as the Japanese consumer clearly went into a funk at the end of Q3. Furthermore, as many commentators have pointed out Japans financing costs of its federal debt the largest in the industrialized world now account for more than 25% of all tax revenues and that fact may have weighed on the banks decision to hold off on tightening until monetary officials were certain that Japanese economy could absorb the shock. With the rate news now behind us the pair is likely to range trade between 120-122 level until Japanese economic data provides a clearer picture on whether the bank will finally act in February or will be forced to hold off for yet another month. With the rest of the G-3 block still showing a tightening bias the yen has clearly become the weakest link in the chain and the units movements going forward are likely to be inextricably tied to the performance of the Japanese consumer.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Meanwhile pound sold off as strong UK retail sales data was not enough to overcome a wave of profit taking. After rallying for 6 out of the last 7 days, cable ran in to a slew of offers at the 1.9770 level despite the fact that Retail Sales handily beat estimates printing at 1.1% versus 0.5%. However, the price correction in cable may well be short lived as UK data continues to impress and points to further rate hikes from the BoE going forward. The only danger to the pound bullish scenario would come from a marked slowdown in UKs housing market. Next week brings the housing data from the Rightmove survey and traders will pay careful attention to this news given the surprising slip in RICS readings this week.
Finally in Europe, the EURUSD retraced most of the nights gains after sovereign demand took the pair all the way to 1.3000 level in Asia trade. The only item on the docket, Italian Industrial sales printed higher but missed the estimate once again, suggesting that Germany remains the primary engine of growth for the region. Whether this fact will be enough to pull overall EZ growth higher remains to be seen. For now doubt remains about the pace and intensity of any further ECB tightening and if EZ data begins to falter, rate expectations may be lowered even further. As of now the FX market remains in limbo and prices are likely to consolidate until traders obtain better visibility on Q1 growth prospects throughout the G-3 universe.
