Yen Starts the Week Strong As End of ZIRP is Near

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      ·          JPY Machine Orders continue to post double digit gains

·          JPY <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />EcoWatchers slips below 50

·          Japan bank lending fastest pace in decade

·          UK PPI contracts relieving pressure on BOE

·          French Industrial data expands better than forecast

·          US calendar only wholesale sales

Yen was the star of the show in the currency markets as dealers commenced the new week of trading by pushing the pair below 113.50 - the first time it traded at that price in more than amonth. Economic news from the land of the rising sun was generally bullish with Machine Orders registering a second consecutive double digit gain for the month jumping 15.8% versus 12.4% expected. Bank lending figures also demonstrated the underlying strength of the Japanese economy as they expanded at the fastest pace in a decade to 1.8%. The only trouble spot for yen bulls was the reading from the Eco Watchers consumer sentiment survey which slipped below the 50 boom/bust for the first time in 14 months. The Eco Watchers is our favorite forecast indicator of future Japanese consumer demand  and the fact that this gauge slipped suggests that the record high energy prices are exerting a painful toll on the average Japanese consumer. Should oil continue to trade above 70/bbl while yen remains relatively weak, the erosion of purchasing power for Japanese consumers could jeopardize what up to now has been a relatively robust recovery. 

Traders, however, dismissed any concerns emanating from the Eco Watchers numbers and focused instead on the probability of the end of ZIRP at this weeks BOJ Monetary Policy meeting.  Despite the lingering aftereffects of the Fukui scandal and the threat of additional missile launches from North Korea, the market is convinced that the BOJ will act at the July 13^th meeting by raising rates from 0 to 25 basis points. Should it do so, the central bank will acknowledge that Japans decade long battle with deflation is finally over and will in effect signal to the currency market that the salad days of the carry trade are over.

In Europe, the euro continued to give back its knee jerk gains after last Fridays weak US NFP numbers. German Trade Balance reported slightly better on the headline level but exports actually dropped more than anticipated perhaps due in part to the strengthening exchange rates. French Manufacturing and Industrial Production both beat forecasts but the news had little impact on trading as focus now shifts to the August series of rate hikes from ECB and the Fed.  As weve noted before if the ECB only raises rates once in August by 25bp while the Fed matches their move the interest rate differential in the pair will remain unchanged, limiting any upside potential for the euro. 

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