Yen and Pound Decline, Euro Motionless

A relatively quiet session of Asian and European trade tonight characterized by profit taking in the yen which declined against the dollar after three straight days of gains. With no economic news on the calendar, trading was driven primarily by technical factors as demand from importers and short term speculative accounts drove USD/JPY to a high of 116.46 before the pair sold off slightly. With the prospect of further interest rate hikes from BOJ this year still in doubt, speculative players trying to put on fresh carry trades availed themselves of the opportunity to establish lower entry points by purchasing USD/JPY below the 116.00 level. The yen, though grossly oversold still holds no great catalyst to attract buyers and as such is likely to flounder in the range for the time being.

Meanwhile the picture from Europe was decidedly mixed with EZ Retail PMI slipping to 52.3 from 53.8 the month prior, with both French and German components dropping by 2 points each. Only Italy saw a marginal increase from 47.6 to 48.7. Though the index remains above the 50 boom/bust level the news suggests that the slowdown in EZ retail spending may be steeper than the market initially believed. Most notable was the fact that employment dropped for the first time since February, albeit slightly from 52.7 to 52.1. For now the PMI data indicates that the EZ economy continues to expand but at a slower rate and provides little fresh impetus to establish euro longs. On the other hand, German Factory orders, increased a very impressive 7.5% on a year over basis indicating that neither the strong euro nor the higher energy costs have been able to slow the EZ industrial recovery and should that trend continue EZ third quarter GDP is likely to benefit markedly from this pick up in production.

Finally, Australian GDP surprised to the downside growing only at 0.3% versus 0.7% expected. This was the slowest pace of expansion in 3 years and clearly reflects the impact of two rate hike by the RBA which have taken short term yields to 6.0%. Australian Treasury Secretary Costello dismissed concerns stating that the underlying growth is stronger than the data suggests, but we suspect the opposite is true. With commodity prices declining sharply, the prospect for Australian growth looks increasing murky and so does the probability of any additional rate hikes by RBA in the near future.