JPY Tankan in line
JPY Tertiary Index much better than forecast
EUR EZ CPI jumps to 1.9% year over year
USD CPI, TICS critical to greenback
The Tankan survey of large manufacturers printed in line with expectations rising to 25 from 24 the period prior - the highest reading in 5 quarters - while the capex expectations increased at the best pace in 16 years. Despite the strong results the yen continued to weaken in Asian and early European trade as traders remained skeptical that the news would provide enough impetus for BoJ to raise rates next week. The market may well be right that no rate hike will be forthcoming December, however the solid Tankan readings and more importantly the much better than expected increase in the Tertiary activity index which jumped to 2.1% from 1.2%, suggest that BoJ could easily make a tightening move in January of 2007 rather than in March which was the general consensus view prior to the release. The Tertiary index results were especially interesting although they received far less attention because they suggest that the strength of the Japanese industrial sector is beginning to filter into the services arena, all of which should prove supportive to the Japanese consumption which has lagged production materially the whole year long.
Given the fact that yen is woefully oversold, tonights positive news should put a cap on any further yen weakness as speculators begin to consider the possibility that the days of easy money from the carry trade may have already been made. While the interest rate spread between the yen and the dollar will remain substantial even if the BoJ bumps up rates another 25 basis points, the currency markets are far more concerned with the relative direction of the spread rather than its absolute value. As the market begins to realize that the interest rate spread between the dollar and the yen will now inevitably compress as we move into 2007 it should trigger another bout of carry trade liquidation and the recent highs set in EUR/JPY and GBP/JPY could well turn out to be peak values.
