Euro and Yen Tread Water as World Awaits FOMC

Talking Points

·          JPY retail surprisingly strong

·          GFK confidence up

·          NZD trade deficit balloons, kiwi at 25month lows

·          FOMC 2 day  meet begins today

German consumer confidence continued to improve in July printing at 7.8 versus 6.8 expected but the EUR/USD actually declined in early <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />European trade as market players shifted focus to the 2 day FOMC meeting which starts today. The near universal expectation from traders is that the Fed will hike by 25bp, however, the FOMC policy posture going forward is the great unknown. Some analysts astutely pointed out that while a slew of famous Fed watchers from Bloombergs John Berry to Wall Street Journals Greg Ip have all stated that the Fed will likely pause after this hike, the rhetoric from US monetary authorities has been extraordinarily hawkish offering no signal of any slowdown.  This disconnect between the words of the Fed officials and the conclusions  of the most prominent market commentators suggests that US monetary policy may be a in state of flux with  policy officials struggling to reach consensus.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Meanwhile in Japan, Retail Trade posted better than forecast results increasing 0.1% from -0.6% expected as the Japanese consumer continues to show strength. Sales were somewhat depressed by unusually rainy weather in May, but spending on fuel products and electronics ahead of the World Cup, offset some of those effects.  The increase in Retail Sales  was the fifth rise in seven months a trend that bodes well for Japanese economic growth going forward.

The Fukui saga continued to dominate news in Japan, as Prime Minister Koizumi was the latest and perhaps the most important Japanese official to come to BOJ Governors defense. In speaking to reporters during a state visit to Ottawa, Canada, the Prime Minister stated there was "no change in my thinking that I want him to complete his term." Several analysts have also pointed out that the actual process of removing Governor Fukui from his post is extraordinarily cumbersome. Unless he leaves voluntarily the Governor can only be turned out if he is judged mentally incompetent or is sentenced to prison. Nevertheless, the state of uncertainty that hangs over Japanese monetary policy must be resolved quickly if the yen is to benefit from the strong Japanese economic data. FX markets almost always require resolution of political problems before responding to positive economic factors and until such time that the Fukui matter is settled, the yen remains in limbo.

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