Economic data weighs on the Euro

The ZEW survey of
economic sentiment rose to 39.4 from the prior period reading of 38.6

but the results fell short of market expectations of a rebound to 42.0 and
weighed on the EUR/USD which tumbled below the 1.2000 figure once again hitting
a low of 1.1960 in early European trade. Investor confidence was dented by fears
that the new coalition government in Germany will be slow to implement the
necessary reforms.

But the tone was affirmative overall, as economic
growth supported by a lower euro has pushed investor sentiment higher for the
third month in a row. German Producer Prices which rose to 4.9% also helped slow
euro decline as market expectations of a possible ECB rate hike increased
ratchet up.

The real story of the night however occurred in
the USD/JPY which appears to be headed straight for the 116.00 figure setting
new yearly highs. Propelled by the relentless pressure from new carry trades and
stubbornly high oil prices, the pair is also rising due to a massive imbalance
in positioning. Our proprietary Speculative Sentiment Index registered an
unheard of reading of 6 yen longs for every dollar long yesterday as everyone
and their mother tried to pick the top of the move. As long as positioning
remains so heavily skewed to the yen side, the pair is unlikely to correct
substantially.

However, as the last of the diehard yen bulls get
squeezed after the pair crosses the 116.00 barrier and as worries over Wilma
recede from the oil market possibly pushing crude below $60/bbl the yen may have
a chance to rally. Nevertheless, all those looking for a turn must give the pair
plenty of leeway as the uptrend in USD/JPY has not reached exhaustion just yet.

Boris

Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.