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Forex Blog - Bernanke, Payrolls wil be Key
Bernanke, Payrolls wil be Key by Ashraf Laidi 6/02/08
In addition to this weekâ€™s ISM surveys and Friday's labor
report, Tuesday's speech by Fed Chairman Bernanke should be instrumental in
adding further certainty to the marketâ€™s probability of 2008 Fed policy.
importance of Bernankeâ€™s speech lies in the fact that his views on the economic
outlook have not been revealed since his last Congressional testimony in April
2-3. Since then, most FOMC officials have stepped up their anti-inflation
rhetoric, with the more hawkish ones (Kohn, Fisher and Kroszner) implicitly
dismissing the case for further rate cuts. Nontheless, the Fed's latest central
tendency forecasts issued downward revisions on growth and upward revisions on
unemployment. How will Bernanke balance these forces with rising inflation
risks wil be the key. We expect Bernanke to sound off a firmer tone on
inflation and acknowledge the relative stability in financial markets, rather
than discuss any improvement on the macroeconomic front. Said differently, the
speech is will more likely to eliminate market expectations for a rate cut this
summer, rather than add to existing expectations of a rate hike by year-end.
Todayâ€™s release of the May manufacturing ISM and Wednesdayâ€™s release of
services ISM will also be key in further gauging the extent of the recession in
manufacturing and the slowdown in services as well as the employment outlook in
the sectors. May non-farm payrolls are expected to show a loss of 50K jobs in May from a
loss of 20K in May, with the unemployment rate edging up to 5.1% from 5.0%. We
expect prolonged losses in payrolls into the rest of the year to dampen
consumer spending and force the Fed into renewed easing in Q3 once equity
markets are pressured by the economic fundamentals.
Euro Struggles Despite IMF Upward Revision
Euro treads lower despite Eurozone factory PMI edged up to 50.6 in May from
earlier estimates of 50.5. The figure, however, is lower than April's 50.7. The
IMF revised its 2008 Eurozone growth forecast to 1.75% from initial estimates
of 1.4%, but expects growth slowing to 1.25% in 2009. The Fund said inflation
is uncomfortably high and expects it to remain above 3% in the near future,
well above the ECBâ€™s mandated ceiling of near 2.0%. It also deemed current ECB
rates as â€śappropriateâ€ť and to remain steady for the rest of the year. Last
weekâ€™s latest evidence of further rise in Eurozone inflation means that ECB
president Trichet will preserve his hawkish stance in Thursdayâ€™s press
conference. Tomorrowâ€™s speech by Bernanke should also help determine whether
the euro could recover above the $1.56 figure.
Separately, remarks from the special economic adviser to the ruler of Qatar indicating the need
for action on currency policy in order to tackle surging inflation are among
the recent factors raising the probability of a revaluation of Gulf currencies.
The recognition of rising inflation by the Fed and the US Treasury attests to
the prolonging of general inflationary pressures, thereby most likely prompting
GCC countries into action on the forex front. The political factors preventing
a depegging from the dollar are considerable, thus leaving revaluation as the
only option. Any signs of revaluation are likely to have a negative USD
reaction to the benefit of the euro.
Resistance is expected to prevail above the $1.56 figure, while downside is
seen testing 1.5480 and 1.5440. We expect the euro to remain largely on the
defensive ahead of Fridayâ€™s US payrolls.
Sterling Shows Why It Remains an Undesired Currency
Sterling continues to demonstrate why our
bearishness in the currency remains unfazed despite gains of the past 2 weeks.
The currency lost 2 cents in a few hours, reversing all the advances made in
more than one week after UK mortgage approvals hit a record low of 58K in April
(versus expectations of 65K and previous 63K) and total lending dropped to a
Separately, UK manufacturing PMI
fell to 50.0 in May from 50.8, undershooting forecasts of 50.5. The figure was
the lowest since July 2005. The theme of slowing business activity and rising
inflation is further resounding inside the central bank. The output price index
rose to 62.0 from 61.9, attaining an uninterrupted streak of 34-consecutive
The deteriorating data picture in the UK supports our
forecast for interest rates to reach 4.25% by year-end from their currency
5.00% despite deteriorating inflation. We expect the combination of prolonged
credit crunch and a weak UK consumer to shift
the priority to economic growth away from the Bank of Englandâ€™s government
imposed inflation target.
is seen holding at $1.9580, a breach of which is likely under a stronger than
expected ISM reading (above 49). Upside seen capped at previous support of
USDJPY Eyes 104.30
Yen bulls regain control after S&P and Dow futures moved lower in Asian
trade. Stability in equity futures later in the session failed to boost USDJPY.
Last week we noted our skepticism with the pairâ€™s breach of the 105.50
resistance to a 3-month high of 105.80 due to the â€śchallenges encountered by
the market and US economy amid further increase in bond yieldsâ€ť. Although we
expect the Fed pause to continue into Q3, we continue to disagree with
forecasts calling for any rate hikes before Q2 2009. Instead, we see room for
at least one more rate cut this year. Key support stands at 104.30, backed by
the 100 day MA
Chief FX Analyst at CMC Markets, oversees the analysis and forecasting
functions of key currency pairs as well as decisions and trends of the major
global central banks. Mr. Laidi is also responsible for education and informing clients on the essential
dynamics underpinning FX markets.
joining CMC, Mr. Laidi has worked for such varied organizations as the United
Nations, the World Bank, and Reuters. Mr. Laidi regularly provides expert
opinion to various electronic, print and the broadcast media outlets.
Mr. Laidi has appeared regularly on CNBC-TV, Bloomberg TV, the BBC and PBSâ€™
Nightly Business Report. His insights also appear in the Financial Times, The
Wall Street Journal, Barronâ€™s, The New York Times, CBS Marketwatch,
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