Forex Investment and Currency Trading

Eurozone German state CPI readings point to a soft headline inflation in April in Germany. Most regional CPIs (except for Bavaria state due to report at 13:00 GMT) posted declines in April, between -0.2% mom and -0.3% mom, suggesting the overall German headline CPI at 2.4% yoy in April from 3.1% in March (consensus: 2.8%). The major causes of the sharp fall in inflation were the early timing of Easter, which added 0.1ppt to yoy inflation in March and subtracted 0.2ppt from headline rate in April,
and base effects of 0.2ppt, as tuition fees introduced in April 2007 dropped out of the yoy rate. Furthermore, there was no major rise in petrol prices despite oil price spike, while food price inflation declined as butter prices continue to fall. However, the spike in oil prices over last few weeks, and the end of the Easter effect, will probably push German inflation back to around 2.8% yoy in May. Separately, Italy business confidence fell more than expected to 86.9 in April from downward revised 88.8 in March, consistent with the soft April business surveys in other Eurozone economies. Overall, the downside surprise in German CPI data, coupled with the moderation in business sentiment across Eurozone, suggest that the previous rate hike expectations were premature. Market expects the ECB to remain on hold until 4Q 2008, with the first 25bp rate cut likely in October.

Japan USD/JPY traded in a narrow range ahead of key central bank events in Japan and the US this week, while the JGB market saw some attempts to buy on dips, particularly in super longs. It is premature to expect a sustainable USD uptrend, and a break above the key resistance zone of 105.00-105.22 is probably not easy. Retail sales growth slowed to 1.1% yoy in March from 3.2% yoy in February only marginally stronger than the consensus forecast. Seasonally adjusted retail sales rose by 0.5% mom in March but was flat qoq in 1Q 2008 (+0.8% qoq in 4Q 2007). The repeal of the gasoline and new motor vehicle registration tax surcharges (despite the ruling coalition’s defeat in Sunday’s Lower House Yamaguchi by-election) should push up April retail sales temporarily, but the Fukuda Administration intends to revive these surcharges from May, probably resulting in deterioration in consumer sentiment with lower real discretionary spending. As for Wednesday’s BoJ semiannual outlook report, given higher-than-expected Tokyo core CPI inflation (+0.7% yoy in April) and the expected re-introduction of the gasoline tax surcharge from May, the BoJ Policy Board’s FY2008 central forecast of core CPI inflation is likely to be set higher than the level expected before the CPI release — probably just below/at 1.0%. Still, this should represent a slowdown from the March reading of 1.2% yoy for nationwide core inflation. The more important should be the real GDP growth central forecast, which should be set at 1.5% or so, the low end of the potential growth range, suggesting a gradual subsiding of inflationary pressure after a near-term pickup. While the report is likely to reveal the BoJ’s shift from the de facto tightening bias to a neutral stance, Governor
Shirakawa’s press conference remarks are likely to be well-balanced again. A BoJ rate cut will probably be off the table until evidence of deterioration of the economy emerges, but a rate hike is highly unlikely this year. Thus, there should be room for JGB yields to drop. Meanwhile, Wednesday’s industrial production data should offer key indications on the business cycle direction.