In the wake of an uneventful G-7 meeting marked by relative nonchalance of Eurozone monetary and fiscal officials regarding the possible economic slowdown in the region.
â€¢ Japanese Yen: UK Telegraph claims JPY banks hold subprime losses
â€¢ Euro: French IP improves but ITL contracts significantly
â€¢ British Pound: PPI ultra hot raises issues on timing of further BOE easing
â€¢ US Dollar: no data on tap
Euro Tries to Bounce But Concerns Linger; Pound PPI Ultra Hot
In the wake of an uneventful G-7 meeting marked by relative nonchalance of Eurozone monetary and fiscal officials regarding the possible economic slowdown in the region, the EURUSD tried to stage rebound as trading started for the week, but the pair soon lost momentum at the 1.4570 level as concerns in the market lingered regarding its economic health. Overnight data from the EZ was mixed at best as French Industrial Production recovered in December. but Italian IP contracted significantly. There is gnawing suspicion amongst traders that ECB may be too late to realize the extend and severity of the deceleration that is now taking place in the 15 member union and so far the latest economic results from the EZ have not been able to allay those worries.
Meanwhile in UK, PPI data printed ultra hot with year over year core reading jumping to 3.1% from 2.6% forecast well above the BoE target rate of 2%. Itâ€™s doubtful of course that the spike in PPI will translate directly into higher prices for consumers as pricing pressures in UK are relatively weak given the decline in housing and slowdown in retail sales over the past several months. Nevertheless, the latest inflation news is certain to make MPC members pause in considering any immediate additional easing action. The BoE may in fact choose to remain stationary for the next several months and the absence of the threat of further rate cuts could relieve some of the selling pressure on sterling in the near term and see the pair bounce from the double bottom formed at the 1.9400 figure earlier today.
Finally a report from UK Guradian newspaper over the week-end speculated that a significant portion of sub-prime debt may be buried on the books of Japanese banks. The story offered no direct proof of this notion and so far public announcement from Japanese financial institutions have indicated that their exposure to the asset backed marked has been relatively small. Nevertheless, if Guardianâ€™s suspicions that a significant amount of Japanese capital surplus was recycled into the CDO market are correct, then the yen could strengthen further as Japanese banks repatriate capital to shore up their balance sheets in the aftermath of the losses incurred in that market. That in turn could bring USDJPY back to the critical 105 level and may set the stage for a battle with BOJ. For more discussion on the subject read our special report 105 Dollar Yen - Is That Threshold of Pain For BOJ?
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