Talking Points
• Japanese Yen: GDP much better due to jump in exports
• Australian Dollar: Consumer Confidence hits lowest point in 15 years
• Euro: Industrial production much better than forecast
• Pound: Trade Balance relatively in line
• US Dollar: Only monthly budget on tap
After a one day correction EURUSD bounced right back blowing through the 1.5400 figure and zeroed in on the 1.5500 level as better than expected Industrial Production data provided more evidence that EZ economy continues to decouple from the problems in US. Industrial Production jumped to 3.6% from 2.6% forecast as the regions producers grew at a healthy pace irrespective of the disadvantageous exchange rates. Still, with the pair climbing to record highs, further progress for the EZ industrial sector is likely to be considerably more difficult. Nevertheless, for the time being the economic news continues to support the euro bulls argument for decoupling and until the market begins to see evidence to the contrary the path of least resistance in the pair remains up.
In Asia, Japanese GDP figures showed a surprising increase to 3.5% from 2.3% with growth fueled by exports to emerging market nations. Although Japan remains an export driven economy, it is becoming less and less depended on the US market as a primary source of revenue. As emerging market nations continue to expand and grow they become increasingly more important to Japanese multinationals making them less vulnerable to any downturn in US demand. Furthermore, while exchange rate differentials in USDJPY have made the US market considerably less profitable as yen has appreciated, the relatively high levels of EURJPY have allowed the Japanese corporates to shift their focus to the EZ as they try to increase their profitability in that region.
In short, this new dynamic may go a long way towards explaining why the Japanese officials have been relatively lasses-faire in their attitude towards a strengthening yen even as the pair approaches the key 100 barrier. The US market, while still important to Japanese commercial interests is not longer be the primary driver of Japanese growth and as such USDJPY exchange rate matter far less to Japanese policymakers than they did a few years ago.
Meanwhile in UK, the GBPUSD continued its rebound as the Trade Balance data printed more or less in line aided by higher EURGBP exchange rates that helped UK producers. More importantly, the markets have viewed yesterday’s Fed announcement as a boon for the pound, given the raft of credit problems in UK capital markets. If equities can put in another positive day, cable should continue to perform well especially on the crosses against the low yielders.
In US today, event calendar is essentially empty with only the monthly budget data on the docket. FX flows are likely to be driven by equity market movements and if risk appetite returns for a second day, the euro may tackle the 1.5500 figure once again as the decoupling thesis remains in place.
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