Euro Well Bid in Holiday Trade

Talking Points

        ·          Japanese Monetary Base contracts as liquidity curtailed

·          Euro-zone PPI in line

·          UK Construction PMI contracts sharply

·          US on July 4^th holiday

The euro continued to display a bullish tone in very quiet dealing with North American markets essentially closed for a four day holiday week-end until tomorrow. The sole piece of economic news from the Euro-zone printed in  line with expectations as PPI posted a 0.3% <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />month over month gain. On a year over year comparison the report showed that prices increased 6.0% driven primarily by the soaring cost of energy.  With inflation data in tow, focus now turns to ECBs meeting this Thursday with speculation running rampant that the central bank may choose to hike rates this week, rather than wait until August. The anticipation of a possible rate hike has been the primary cause of euro strength over the past several sessions as the unit hit highs against both the yen and the Swiss franc while trading above the 1.2800 level again the dollar. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

In Japan, the yen remains pulled in two directions as the prospect of the end of ZIRP competes against the possibility of Fukui resignation. Japanese fiscal officials appear to have grudgingly accepted the fact that rates must rise in the wake of the strong Tankan results with only Finance Minister Tanigaki still arguing for the status quo of ZIRP. Economy Minister Yosano on the other hand, went so far as to state that, People on my staff are even talking about an economic bubble, so it seems odd to still be talking about deflation.

Despite Mr. Yosanos views however, the Bank of Japan is most likely to wait until the August meeting before lifting of ZIRP in order to insure that economic recovery is able to absorb the news with minimal impact. Although some analysts have suggested that BOJ central bankers may wish to assert their independence from the politicians and raise rates at the banks July policy meeting a week from this Thursday even as the scandal surrounding Governor Fukui refuses to die down. Some clues to BOJ intentions may come from the upcoming series of consumer survey reports due next week. If Japanese consumer sentiment which has actually moderated over the past several months rebounded strongly in June, the BOJ may have no choice but to raise rates in July, Fukui scandal or not.

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