IFO Confounds Bears, But Fails to Fuel Euro

Talking Points

·          Fukui troubles wont go away

·          IFO up but of little help to the euro

·          BBA mortgage approvals jump more than 20K in May

·          US Consumer Confidence sole event on calendar

The IFO business sentiment survey posted a 15 year high, confounding analysts who predicted that  the trfecta of higher oil prices, higher interest rates and higher exchange rates in the Euro-zone would finally weigh on the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />index.  IFO rose to 106.8 from an upwardly revised 105.7 beating forecasts of drop to 105. IFO readings stood in sharp contrast to last weeks ZEW survey which declined for the fourth consecutive month. More importantly, todays robust results provide plenty of reason for ECB to raise rates at least another 25bp within the next two months and make yesterdays hawkish commentary from a variety of EZ monetary officials all the more credible to the currency market.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The IFO report itself, however, failed to ignite a rally in the EUR/USD as the pair pierced the 1.2600 figure in pre-announcement trade only to sell off to 1.2570 afterwards. The FX market is torn between the dueling hawkish signals from the two Central Banks  with dealers trying to gauge whether the Fed or the ECB will tighten more aggressively in the next two months. On the US side with 25bp increase essentially baked in, the market will need to see decisive language from the FOMC stating that the rate hike policy will continue into August, in order for the dollar to maintain its strength.  

Across the Pacific, Governor Fukuis troubles continue and so does yen weakness. In a story that just will not die, it was the governors wife that came under the light of public scrutiny today when it was revealed that she benefited from shares in a railroad company in which indicted fund manager, Yoshiaki Murakami, actively traded. The Fukui story has taken on a familiar motif with the Japanese political establishment offering universal albeit tepid support, while the public continues to clamor for his resignation. The latest polls show nearly 70% of the respondents believe the BOJ chief should step down. With public opinion polls so heavily negative its doubtful Mr. Fukui will be able to maintain his post much longer. At best he will be damaged goods and despite his clear talent and the confidence from the FX markets, he may have a difficult time managing the critical transition from ZIRP.  In the meantime the yen remains in limbo as the scandal rages on, continuing to weaken amidst the uncertainty.

FX Upcoming