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Daily Fx Strategy

Euro Soars as CPI Justifies Hawkish ECB

Wed, Apr 16 2008, 12:12 GMT
by Ashraf Laidi

CMC Markets

Euro surges to a new all time high of $1.5966 after Eurozone March inflation was unexpectedly revised to a record 3.6% y/y from the initial 3.3% estimate, validating the European Central Banks’ relentless hawkish rhetoric and further dampening any chances for a near term interest rate cut. A broad euro rally is accompanied by a deepening dollar sell-off, prompting oil to a new record of $114.46 and lifting gold to a 1-week high of $939 per barrel. Oil’s rally is also prompted by reports of a peak in Russian production.

The extent of resulting dollar weakness is especially highlighted by its decline against the floundering British pound, which has remained on a continued downtrend against all major currencies for the past 4 weeks. It is worth noting that the yen’s rise versus the dollar is not a reflection of falling risk appetite as the currency is being pressured by most of the major currencies. Therefore the theme of falling dollar, rising commodities is likely to prevail throughout the rest of the trading day, with negative earnings surprise being the main downside to this assessment.

China’s decision to raise its reserve ratio on banks for the 16th time since 2006 is having little impact on global equities, but may further complicate the climate for the already tumbling Chinese indices. The People’s Bank of China raised its the reserve requirement by 0.5 percentage point to a record 16% to stabilize escalating credit growth better manage overall.

It will be busy 8.30 am EST when US CPI, housing starts, building permits are due, followed by industrial production at 9.15 am and the Fed’s Book at 2.00 pm. The Markets are bracing for a possible upside surprise in the headline CPI, beyond expected 0.3% following a February figure, with the core CPI seen up 0.2% following a flat figure. Recall that yesterday’s release of a higher than expected PPI boosted the dollar across the board, but that may also be a result of better than expected Empire manufacturing report.

The 9.15 am release of March industrial production is expected to show a 0.1% decline following a 0.5% drop, while capacity utilization is seen at 80.3% from 80.4%.

San Francisco and Philadelphia Fed presidents Yellen and Plosser are due to speak at 11.30 am 12.30 pm respectively. Yellen’s speech will be more of use to the market as it will cover economic outlook.

Euro Nears $1.60 on 3.6% CPI, US CPI May Stop Road to $1.60...for Now

EURJPY is seen extending gains towards 161.45-50, followed by 161.90, due to the combination of better than expected earnings from JP Morgan Chase and Coca Cola a possible recovery in risk appetite and US equity indices. Support climbs to 160.70.

EURGBP rally remains a textbook rally in foreign exchange market as the EUR is boosted on rising inflation and robust economic fundamentals while the GBP rests on a slippery slope of further rate BoE cuts that may amount to a total 100 bps. Yesterday we mentioned “Upside capped at 0.8075, followed by 0.8095”. We stick with this call.

Sterling Downtrend Remains Firmly Cemented

Yen Retreats the Least Against USD

Published on  Wed, Apr 16 2008, 12:31 GMT

Archive

• CPI Softens Dollar Rebound, to Boost Risk Appetite
  Published On Wed, May 14 2008, 13:32 GMT
• Dollar Cheers Sales, Ignores Autos
  Published On Tue, May 13 2008, 13:41 GMT
• Sterling Deepens Gloom, Yen Gains on Risk Appetite
  Published On Fri, May 9 2008, 14:57 GMT
• USD Unable to Follow up, GBP Down Across the Board
  Published On Mon, May 5 2008, 14:58 GMT
• Why Optimism Remains Premature?
  Published On Mon, Apr 21 2008, 15:03 GMT

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