Euro and Yen Fade in Listless Trade

A very listless night of trade as currency markets wandered aimlessly in very tight ranges for most of the Asian and European sessions after absorbing a very busy week of economic data. In Japan the Tertiary
index, a measure if the country’s service sector, continued to disappoint printing at -0.4% vs. -0.1% expected. This was the second consecutive
month of negative readings lead by a massive 13% drop in demand for postal services which include savings and insurance as Japanese retail investors continue to favor deposits in high yield currencies such as the Australian and New Zealand dollars. In short as Governor Fukui described it, the economic news was “mixed”, making it uncertain as to whether the BOJ will actually move in rates next week. While the notion of a mere 25bp hike may seem trivial from the perspective of other G-7 nations, traders need to bear on mind that even such a small hike by the BOJ would in effect instantly double short term interest rates in Japan. Therefore, strong GDP numbers notwithstanding BOJ monetary authorities may be reluctant to force a tightening at this time for fear of depressing the already fragile Japanese consumer.

Some analysts even suggested that the bank may opt for a Solomonic solution of raising rates by only 12bp thus reaffirming their commitment to price stability without affecting consumer demand too harshly.

In EZ the Trade Balance data printed positive for December, showing that the region was once again in surplus in Q4 of 2007. However the gain were smaller than expected on a seasonally adjusted basis suggesting that the high EURJPY rate may be impacting growth at the periphery. EZ’ s direct trade with Japan accounts for only 3% of the total flow, but the Europeans may be losing business to Japanese in the North American and Asian markets and should this trend exacerbate in the next several months the rhetoric from the region’s fiscal policy makers is likely to grow only more strident.

In the meantime, the EURUSD continued to retreat after failing to break through the critical 1.3175 level yesterday despite shockingly poor TICS number. If today’s US housing data surprises to the upside, the greenback may see
further strength as traders will become convinced that the strong bounce in the NAHB survey on Thursday wasn’t just a function of home builders talking their book, but rather the first tangible sign of a real bottom in the housing sector.


Kathy Lien is the Chief Currency Strategist at

Forex Capital Markets. Kathy is responsible for providing research and analysis
DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.