Talking Points
• Australian Dollar: Construction remains solid
• Japanese Yen: Weaker as equities recover
• Euro: Retail Sales remain weak
• British Pound: Lowest December BRC in 3 years
• US Dollar: Pending Homes on tap
A battle of attrition in the currency markets tonight as neither bulls nor bears are able to get much traction and are stymied by unsupportive economic data and lack of clarity on the monetary front on both sides of the Atlantic. The EURUSD raced to a high of 1.4735 in early London trade as a rally in equities helped boost the carry trades and EURJPY in the process, only to give up most of its gains after a disappointing Eurozone Retail Sales number.
Retail sales in the Euro-zone fell -0.5 percent during the month of November, pulling the annual rate down to -1.4 percent - the sharpest drop since record keeping began in 1996. Both food and non-food products contributed to the declines which in retrospect was not surprising given the recent deterioration in consumer confidence gauges. Still, the markets were looking for 0.5% gain and today’s news is hardly seen as supportive of any future rate hike from the ECB. Despite President Trichet’s consistently hawkish rhetoric the ECB will be in no position to tighten monetary policy in Q1 of 2008 if consumer demand remains weak.
Given fresh evidence that the economic slowdown is becoming global in nature, the currency markets therefore find little positive reason to be long euros and the unit’s source of strength will only come from further dollar weakness. To that end, today’s US Pending Home Sales number may prove market moving if it shows a wider than expected decline. Granted, sentiment towards US housing sector is already extremely bearish, but if the data shows no bottom in sight expectations for a 50bp cut from the Fed are likely to increase. On the other hand, if the number shows a better than expected result the greenback may see a mild boost in North American trade.
Overall however market action continues to suggest consolidation for the pair in the 1.4500 –1.4750 zone until fresh data provides traders with some directional bias. For the time being neither the EZ nor the US economy are impressing anyone in the currency market and stalemate is the order of the day.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]
