Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· JPY BSI Large Manufacturing exceeds expectations
· French Consumption explodes 3.3% vs. 05.5 expected
· EZ Industrial Orders slightly better
· USD nothing on the calendar
The aftereffects of the extremely poor results from the Philly Fed survey continued to reverberate through the currency markets tonight with EUR/USD climbing above the 1.2800 level and Swiss franc finding strength against both the greenback and the euro. The shockingly low number which printed at -0.4 versus 14 expected fueled fears that US economy was headed for a recession rather than just a soft landing and prompted a spate of short covering in the pair. While hardly representative of the whole US industrial sector, the Philly Fed nevertheless carries weight with the market because of it canary in the coal mine nature. It tends to be extremely sensitive to economic demand. More than the negative value the first such reading since April of 2003 was the sheer size of the drop in the survey which spooked traders and spurred speculation that the slowdown in the housing market may now depress consumption in the overall US economy.
Certainly, any notion of further rate hikes by the Fed was completely squashed by the Philly Fed results driving the EUR/USD to weekly highs. The unit also received support in over night trade from strong economic data which included a very sharp jump in French consumption which rose to 3.3% from 0.5% expected and EZ Industrial New Orders which increased 9.4% on a year over year basis. For now, the EZ economy appears to be unaffected by either the higher exchange rate rates in the EUR/USD or the nascent slowdown in US economic demand. If this decoupling in economic growth continues and it is a big if the pair is likely to rally further and may even make a run at its all time highs near the 1.3600 level. However, we are far away from those levels now and the unit will have to overcome the massive resistance at the 1.3000 barrier first. One possible obstacle to further appreciation may be the EZ monetary and fiscal authorities themselves. Should EUR/USD quickly reach the 1.3000 figure while EUR/JPY trades above 150.00, the rhetoric from EZ policy makers will become decidedly more strident and pressure on ECB officials to suspend the rate hike campaign will increase exponentially.
Meanwhile the true star if the night was the long suffering Swiss franc which has been sold mercilessly in the currency market over the past few months despite producing stellar economic results because its low interest rates made it a prime candidate for carry trades. With the market quickly coming to the conclusion that further rate hikes in the US and perhaps even in the Euro-zone may not materialize, yield has lost its allure. As a result the franc gained nearly 100 points against the greenback and 60 points against the euro in tonights Asian and European sessions. News that European drug maker Merck was buying Swiss based Serono for 13 Billion also helped the Swissie.
