Swiss Franc Gains as Traders Seek Safety

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·          AUD employment blows out expectations raise chances of rate hike in August

·          NZD Retail sales rebound strongly

·          BOJ starts policy meeting

·          <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Middle East, Iran, NK rattle the markets sending flow to CHF

Plumes of black smoke at theBeirut airport resulting from volleys from Israeli warplanes and warnings from Iranian President Mahmoud Ahmadinejad that Tehran could halt UN inspections and quit the nuclear Non-Proliferation Treaty if subjected to increased pressure over its disputed nuclear program rattled the FX market in early Thursday morning dealing as traders flocked to the safety of the Swiss franc pushing the EUR/CHF cross to a new two week low of 1.5630.  As geo-political tensions mounted over the past 24 hours sending oil to record highs, market players attention has shifted from routine economic concerns  to fears that the recent spate of violence  in the Middle East and the ever more strident rhetoric from Iran may push the world to the brink of a diplomatic crisis in the coming weeks. The Swiss franc as the traditional store of safe haven capital has benefited as a result and may continue to be bid for the rest of the week should the situation in Middle East and the Persian Gulf deteriorate further.

On the economic front, all eyes will be turned to the BOJ tomorrow night as the two day Monetary Policy committee meeting comes to a close. The market expects the BOJ to lift rates from  zero to 25bp, although some analysts have suggested that the Central Bank may opt for a more cautious option of only a 10-15bp hike. Meanwhile economic news from Asia Pacific region was particularly robust with New Zealand Retail Sales rising 1.3% versus 0.5% expected while  Australian employment rose a whopping 52K from 10K expected. To put the Australian figures into perspective they  would translate into an equivalent of 780K new jobs created in US on a monthly basis. The boom in the region continues to be driven by the torrid pace of growth in China which just reported that its  Q2 GDP expanded to 10.9% up from 10.3%. Chinas impressive economic growth bodes well not only for the Aussie and the kiwi but for yen as well. As Chinas largest trading partner Japan will remain the primary beneficiary of any additional pick up in demand. Should this dynamic continue for the later half of 2006, Japanese monetary policy may become far more hawkish than most market players currently believe.

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