AUD Building approvals plunge
JPY Capital Spending slows markedly
EUR ECB adjust inflation expectation downward
USD Pending Home sales on tap
The start of the week brought a much need retrace rally for the grossly oversold dollar as the market has tempered its expectations of Euro-zone inflation in 2007. A report in FT Deutschland suggested that the ECB has lowered its 2007 inflation projections to 1.9% - markedly less than the current 2.4% rate and below the central banks own 2% target. In support of that thesis, tonights EZ PPI data also printed below forecast at 0.0% versus 0.2% expected. If inflation in the 12 member region is indeed moderating due to lower energy costs and slowing global demand, it will reduce the need for additional rate hikes beyond the expected 25bp bump this week. The EUR/USD in turn may slow down its meteoric ascent as market players readjust their interest rate expectations. To be sure, the euros gains were primarily due to its role as the anti-dollar, after the greenback was bombarded with bad economic data last week, yet part of markets recent enthusiasm for the unit was based on the assumption that the ECB will maintain its hawkish posture and raise rates well into 2007. If the ECB changes its stance, further speculator appetite for euro longs may cool quickly.
The pressure to halt euros rise may also come from the regions corporate sector. A week-end article in UK Telegraph notes the nightmare that faces Airbus which now sits on 221 Billion worth of orders payable in dollars but must incur labor and production costs in euros. With the companys hedges coming off soon, a prolonged exchange rate above 1.3000 would badly hurt the airplane manufacturer. Furthermore, we doubt executives at BMW, Bayer and host of other European corporations slept well this week-end as all of them face tremendous competitive problems in both North America and Asia as the euro continues to appreciate against both the dollar and the yen.
The pair may not challenge the all time highs above the 1.3600 figure unless US economic data continues to deteriorate, but if it does the dynamic may create the perfect storm scenario for the dollar, as the spec driven rally will force a rush to the market by corporate players desperate to hedge their currency exposure which in turn will push the EUR/USD even higher. That why this weeks US economic data remains critical to trade as dollar bulls hope to stop the bucks decline on the back of better than expected US results.
