Talking Points
• Japanese Yen: Above 106.00 as carry EURJPY rises to 169.00
• Australian Dollar: exports at record on high commodity prices
• Euro: EZ Retail sales rebound ECB hike expected
• British Pound: PMI services follows suit all other data and misses to the downside
• US Dollar: NFP on tap
ECB Hike Expected; Will US Economy Lose More Than 100K jobs?
The ECB is expected to hiked rates by 25bp to 4.25% but the key question going forward vis a vis the euro will be – one and done or more to come? President Trichet has continually insisted that the ECB is not about to engage in series of rate hikes and that this policy action was meant only to anchor intermediate term inflation expectations.
Nevertheless, pricing pressures in the 15 member union show no signs of easing as oil continues to trade at record highs. If oil remains above $140/bbl for a prolonged period of time or worse if crude breaches the $150/bbl barrier EURUSD could easily trade through its record highs of 1.6020 as traders begin to price in more rate hikes.
Although European economic data is starting to show sign of deterioration with tonight’s EZ PMI Composite reading slipping to 49.3 (the first time it dropped below the 50 boom/bust line in 3 years) the performance of the overall economy is relatively strong especially versus US. Most importantly, for the time being the labor markets in Europe continue to expand leaving the ECB free to pursue its tightening bias. Therefore, inflation considerations rather than growth issues are likely to guide ECB monetary policy in the near future and if price pressures continue to mount, chance are good that ECB may have to raise rates once more before the year end.
Meanwhile growth is becoming a far bigger concern in UK where today for the third time this week, economic data printed considerably worse than forecast as PMI services recorded a reading of 47.1 versus 49.5. This was the worst performance for services in more than two years and indicates that UK manufacturing, construction and service sectors are all in contraction. If UK economic news continues to worsen the BoE will find it increasingly difficult to remain neutral for much longer and markets will once begin pricing rate cuts into the UK yield curve. Little wonder then that the pound has underperformed this week and EURGBP has once again hit 8000 in overnight trade.
In North America today of course all eyes will be on the NFP report due out at 12:30 GMT. With all leading labor market indicators decidedly bearish, the possibility of -100K print is quite real. As we noted at the start of the week, “If US employment situation deteriorates more that the market expects the prospect of Fed rate hikes will dim even more. Therefore the combination of progressively worse US economic data along with relentlessly restrictive ECB monetary policy may create even more weakness for the dollar in the days ahead and lay the foundation for another runs at all time highs. “
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