Talking Points
JPY Dept Store Sales -1.6%
German Producer Prices in line at 5.9% y/y
ZEW drops markedly but current situation rises
USD PPI and Housing on tap today
The ZEW survey of investor sentiment dropped to a seven year low today registering a reading of -22.2 versus expectations of only a small decline to -8.0. The same litany of worries that have bothered investors over the past 8 months continued to weigh on respondents minds. Higher exchange rates, rising interest rates from the ECB and the prospect of a 3% increase in value added taxes in Germany have all raised concerns that the present day economic recovery in the 12 member region may not last. Despite the gloomy assessment of the future, the current situations reading improved to 38.8 from 35.0 suggesting that for the time being growth in the Euro-zone economy continues at a steady pace.
This year, the sharp dichotomy between the future and present day readings has made the ZEW survey a far less reliable indicator of future EUR/USD movements than the much more watched IFO due next week. Therefore, the market took tonights news in stride and after an initial price adjustment to 1.2660 the pair drifted sideways for the rest of the morning European session as traders looked to US PPI numbers for further directional clues to the day. With FOMC on tap tomorrow any upside inflation surprise from the US side may reawaken speculation that the Fed may be forced to raise rates higher after several months of pause.
The true action of the night, however, was centered in the EUR/JPY cross which tumbled more than 100 points in less than 3 hours after carving out a lower double top at 150.24 earlier in the night. The initial spike higher was caused by momentum longs built in the wake of Japans Finance Minister Tanigakis denial of any EUR/JPY G7 discussions. However, contrasting comments by German Finance Minister Finance Minister Peer Steinbrueck calling for a higher yen caught the market by surprise and triggered quick liquidation of spec longs. The net result was a rare night of euro losses and yen gains against the greenback. Yet the price action was hardly surprising. As we noted yesterday, those who hold long USD/JPY positions should tread lightly. For the time being fundamentals are on their side but positioning is not. Yen shorts reached a record high of more than 99K contracts in the latest Commitment of Traders data on the CME and the market will need only a small catalyst to trigger a short covering rally in this massive positional skew.
