For the second month in a row the ZEW survey of institutional investors
surprised to the upside printing at 71.0 versus expectations of 65.
Since November the… … survey has jumped more than 30 points indicating that
investor confidence in Euro-zone economy is becoming much more assured.

The ZEW, in fact, registered the highest reading in 24 months and many
analysts now believe the 1.5% EZ GDP projection for 2006 will have to be
revised upward. To be sure, domestic demand remains the Achilles heel of
the whole euro bull thesis with consumer spending still muted across the
region. Nevertheless, EZ Retail sector appears to be awakening from its
long slumber with yesterdays Retail PMI data reaffirming the fact that
expansion continues. The one risk to EZ recovery remains energy costs,
but the region appears to have adjusted to $60/bbl oil and unless we see
prices spike to $70/bbl pushing gasoline costs in Europe to above 6
euros/gallon, the European consumers should finally open their wallets
stoking the growth rates in the 12 nation union higher. The EUR/USD
recaptured the 1.2100 level as a result of the positive eco news with
some traders beginning to price in 50 basis points of hikes from the
ECB within the next 2 quarters.

Meanwhile in contrast to Europe domestic demand in Japan continues to
falter with Household Spending dropping -1.4% versus projections of
-0.4%. As we wrote in our weekly piece “yen bulls will be hard pressed
to argue that is all is well in the Land of the Rising Sun” given the
still powerful presence of deflation in the Japanese economy. With a
string of disappointing Household Spending results in the past few
months the notion that ZIRP will be abandoned anytime soon, may be
wishful thinking, in which case the yen is likely to resume its decline
as carry traders plow back into the currency.

By DailyFX