Euro 1.60 Just a Matter of Time
Week after week I have called for the EUR/USD to break 1.60. Today, the currency pair hit an all time high and is inching ever so closer to that target. It will just be a matter of time before that level is broken at which time intervention risk will increase substantially. Hot Eurozone CPI numbers and weaker US data drove the EUR/USD to its latest milestone. Inflationary pressures in the region have never been this strong and because of that, the ECB will be in no rush to cut interest rates or to stop the Euro from rising. With both oil and rice prices climbing to another record high, the central bank will only tighten their leash on monetary policy. Rate cuts are completely out of the question and the only thing that can stop the Euro from rising is intervention. We have previously mentioned that the European Central Bank’s pain threshold for the Euro could be as high as 1.62. In 2004, the last time the central bank become extremely worried about the movements in the Euro, the currency had rallied 13 percent in 2 months. In the past 3 months, the EUR/USD only rallied 10 percent; a 13 percent move would put the currency pair at 1.62. Meanwhile Switzerland will be releasing its retail sales report for the month of February along with the ZEW survey of analyst sentiment. Both numbers are expected to improve, but the risks are skewed to the downside.

Dollar Hits Record Low But That May be a Good Thing
The US dollar fell to a new record low against the Euro as the housing market worsens, oil prices rise and the Federal Reserve districts issue a pessimistic outlook on US economy. Although inflationary pressures are a big problem across the globe, the latest consumer price report from the US indicates that the rise in prices has yet to hit the consumer in meaningful way. The numbers are a bit surprising since price hikes have been reported by companies ranging from Kimberly Clark to Hershey’s. The tamer the growth in CPI, the more concerned we are about producers shouldering the cost of rising prices. In the meantime, we are finally glad to see evidence that the weak US dollar is helping the US economy. Industrial production rebounded last month and this week alone, we have had at least 6 major US companies reporting earnings that were directly or indirectly impacted by currencies. Today, Coca-Cola reported a 19 percent increase in profits during the first quarter with currency fluctuations contributing 9 percent. Intel on the other hand said that they are not hurt by the US slowdown because 75 percent of their sales are outside of the US. Abbott Laboratories, a health care conglomerate reported a 14 percent rise in revenue, with currency accounting for 5.5 percentage points of this growth while St. Jude Medical Inc, the second largest manufacturer of electronic heart devices said profit rose 27 percent with gains from exchanging foreign currency into U.S. dollars boosting sales by $45 million from a year ago. Tomorrow we have leading indicators and the Philly Fed index due for release.

Oil Prices Rise Above $115, Driving Canadian, Australian, and New Zealand Dollars Higher
Oil prices rose above $115 a barrel for the first time ever, driving the Canadian, Australian and New Zealand dollars higher. For the past few weeks, the Canadian dollar has bucked its correlation with oil, but the latest rise in prices has been too much for loonie traders to handle. Consumer prices are due for release tomorrow, but that may not matter much if oil prices continue to rise. Even though Australian economic data was weaker than expected, the rise in gold prices and the 200 point rally in US stocks have led the Aussie and Kiwi higher. Australia reported their Westpac Leading Index figures, which contracted for the third month, as businesses become pessimistic about the future, as access to funding continues to decline, in light of tighter credit markets. Looking ahead, Australia is set to report their import and export price index figures, which are expected to report cheery figures. New Zealand did not have any releases today, but investors remain optimistic as oil prices continue to hit new highs.

Stronger UK Employment Numbers Fail to Help the British Pound
The British pound strengthened against the US dollar, but that is more a function of dollar weakness than pound strength because the currency has fallen to new record lows against the Euro. UK employment numbers were slightly stronger than expected with average earnings increasing. Despite the steady employment numbers and the rise in producer prices, analysts strongly believe that the Bank of England will deliver another interest rate cut in the very near future given the sharp deterioration in housing market data. Although we do believe that the BoE is more apt to cut rates than the ECB, even though CPI has not increased that significantly, the rise in PPI is nonetheless worrisome for the central bank.

Strong Rally in Stocks Fail to Help all Carry Trades
US stocks rose more than 200 points but that did not help all of the Yen crosses. USD/JPY pared gains as dollar weakness dominates trading. Increasing Machine tool orders left a glimmer of hope for more positive news from the ailing business sector, but this is highly unlikely as the global economic downturn will have an inevitable impact on once flourishing Japanese exports. Trading volatility should be expected towards the end of the week, as investors get loaded with economic reports. Industrial Production and Capacity Utilization releases should confirm that the economy continues to be in a slump.

Kathy Lien is the Chief Currency Strategist at FXCM.