Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· RBA raises rates but stays mute on future policy action
· Swiss PMI once again above expectation
· EZ PPI up 5.8% year on year
· Only ADP in US
The EUR/USD consolidated yesterdays gains throughout Asian and European trade with the pair basically ignoring overnight EZ economic data. Euro-zone PPI printed at 5.8% on a year over year basis, slightly higher than anticipated but traders focus was already set on tomorrows ECB monetary policy meeting as market participants remained uncertain about the extent of hawkishness that the central bank would display at the post announcement press conference. Yesterday, the dollar cratered despite stronger than consensus results from the ISM survey and hotter PCE data after news that Daimler Chrysler North American sales were off my more that 30%. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The FX market this week is in a constant tug of war between dollar bulls who see strong inflationary pressures in the US economy necessitating higher rates that may rise all the way to 6% and dollar bears who anticipate rapid slowdown in US economic growth led by the beleaguered consumer who is saddled with relentlessly rising housing and energy costs. Yesterdays horrid auto sales figures clearly gave the nod to the slowdown camp but the overall data suggests that both parties may be correct. <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US economy appears to be in a period of both rising prices and lower growth as the effect of $3.50/gallon gasoline finally makes its way felt through the retail system. Many analysts have been quick to label this state of affairs as the return of stagflation but todays period hardly mirrors the days of mile long gasoline lines and 10% unemployment of the 1970s. However, employment growth remains critical to continued health of the US economy and if NFP falters this Friday, it may well be time to pull out the bell bottoms from the closet and dust off the old WIN (Whip Inflation Now) buttons as talk of stagflation will reverberate louder though the markets.
Meanwhile, in Australia today the RBA raised rates to 6% as expected, yet despite the 25bp hike and the better than forecast Retail Sales which rose 1.0% versus 0.5% consensus, the Aussie retreated off the Asia session highs. The silence from the RBA accompanying the rate announcement may have been taken by the market as a tacit indication that this rate hike is likely to be the last for quite some time. Australian economy has been the primary beneficiary of Chinese demand for industrial commodities. However, with policy makers in Beijing finally ready to tackle runaway growth in its booming investment sector by raising bank loan reserves, the market may be thinking that Australias heady days of growth are about to slow down materially as Chinas demand cools.
