â€˘ Japanese Yen: 114.00 deflation remains in place
â€˘ Australian Dollar: LEI at the fastest pace in 7 months
â€˘ Euro: Hits record highs on supportive equity background
â€˘ Pound: Approaching 2.06
â€˘ US Dollar: U of M Consumer Confidence on tap
As evidence continues to mount that US rates are headed significantly lower, the EURUSD rallied to a new record high of 1.4375 in early European trade today boosted by supportive equity price action as the Nikkei rallied more than 220 points. With some traders speculating that the weaker than expected economic data from US this week may push the Fed to cut rates by as much as 50bp next Wednesday the euro continued to benefit from anti-dollar sentiment, despite the fact that EZâ€™z own economic data is beginning to show signs of as slowdown.
In economic news, the German GFK Consumer Confidence poll missed badly to the downside printing at 4.9 versus 6.5 expected. The reading for November hit a seven month low as sentiment soured after market turmoil in August. More troubling still, the propensity to buy index was strongly negative in October at -12.9 versus -2.4 in September suggesting that Retail Sales may come in weaker than expected. Under these conditions, the ECB is quite unlikely to tighten further, for fear of stifling the regionâ€™s delicate economic recovery.
The one factor that may raise some concern amongst the European monetary officials is the continued double digit growth in money supply figures. Tonightâ€™s results of 11.5% year over year growth in M3 were broadly in line but corporate borrowing continued to set a blistering pace of 14.1% year over year growth. The ECB remains vigilant against budding price pressures in the system, but so far the increase in credit expansion has had minimal impact on price levels providing little reason for Mr. Trichet and company to tighten monetary reigns.
Although the credit crunch of August and the developing slowdown in US are clearly starting to weigh on European demand as well, for the time being the market views US monetary policy as highly accommodative and ECB policy neutral at worst. In short US rates will continue to decline while EZ rates will remain steady. As long as that dynamic persists, aided by supportive equity markets the EURUSD should continue its inexorable march towards 1.4500. The only serious barrier in front of euro bulls is the risk of equity market liquidation. That danger is quite real. With US ratcheting geo-political tensions with Iran by issuing new sanctions against the Islamic republic, equity traders may become uncomfortable with the current level of risk and push the DJIA lower later in the day which could halt the EURUSD rally for the time being.