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Wednesday June 11, 2008 - 11:36:49 GMT
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European Forex Blog - Market Update: ECB's Stark Notes that a Series of Rate Hikes is not in the Cards


·UK NIESR GDP Estimate: 0.2% v 0.4% prior

·FR Apr Current Account: -€3.0B v -€2.5B prior

·FR May CPI: M/M 0.5% v 0.4%e || Y/Y 3.3% v 3.3%e

·FR May CPI Harmonized: M/M 0.6% v 0.5%e || Y/Y 3.7% v 3.6%e

·FR May CPI Ex-Tobacco Index: 118.50 v 117.86 prior

·SP May CPI: M/M 0.7% v 0.8%e || Y/Y 4.6% v 4. 7%e

·SP May CPI Harmonized: M/M 0.3% v 0.8%e || Y/Y 4.7% v 4.7%e

·SP May Core CPI: M/M 0.3% v 1.1% prior || Y/Y 3.3% v 3. 2%e

·UK May Claimant Count Rate: 2.5% v 2.5%e

UK May Jobless Claims Change: 9.0K v 8.0Ke || Prior revised from 7.2K to 11.2K

·UK Apr Average Earnings inc. Bonus: 3.8% v 4.1%e

·UK Apr Average Earnings ex. Bonus: 3.9% v 3.8%e

·UK Apr ILO Unemployment Rate: 5.3% v 5.2%e

·UK Apr Visible Trade Balance: -£7.59B v -£7.3Be || Prior revised from -£7.44B to -£7.15B

·UK Apr Trade Balance non-EU: -£4. 18B v -£3.85Be || Prior revised from -£3.772B to -£3.771B

·UK Apr Total Trade Balance: -£4.33B v -£4.0Be || Prior revised from -£4.03B to -£3. 75B

·UK Apr Manufacturing Unit Wage Cost: 0.8% v 0.8% prior || Prior revised from 0.8% to 1.0%


·In the newspapers overnight the Wall Street Journal wrote overnight that Merrill Lynch (MER) has won a $3B credit default swap ruling. Merrill was suing a unit of SCA for improperly terminating 7 CDS contracts, which were related to obligations equal to $3. 1B. In 2007, Merrill insured $3.1B of CDOs against losses by entering into agreements with XL Capital Assurance. La Repubblica wrote overnight that Telecom Italia [TIT.IT] workers are planning a stuck on July 4th. The workers plan to protest the company's recently announced job cuts. The Wall Street Journal wrote overnight that Berry Petroleum (BRY) announced a deal overnight to acquired the privately held O'Brien Energy for $620M. The agreement will allow
Berry to obtain 32M cubic feet/day of natural gas production located in East Texas.

·In energy news overnight the Qatari Oil Minister said overnight that supply issues are not related to the rise in oil prices, adding that there is no current need to increase production. Furthermore the minister asserted that global oil markets are very balanced. According to the Financial Times the CFTC has talked with the
UK's FSA about the possibility for limits on the positions that London oil traders can take. Among the issues discussed, was whether it would be possible for ICE Futures Europe to place limits on the oil positions of traders. The report adds that no decisions on the matter have been agreed upon. According to a press report Saudi Arabia agreed to provide Pakistan with $4.82B worth of oil on credit. Pakistan normally imports about 250K bpd from Saudi Arabia. In an interview with the Gulf News the UAE Energy Minister said overnight that the recent spike in oil prices is "crazy,” adding that markets have enough supplies. The head of the IEA reiterated overnight that it is ready to release stockpile if necessary. The IEA head said that Memeber considering lower speed limits to curb oil demand, noted that the world is facing an oil crisis, and added that OPEC cannot do much to curb oil prices.

·On the speaker front overnight the ECB's Weber said that recent data most likely exaggerates how strong
Germany's economic growth is, adding that he is cautious about a further pickup in the Spring GDP figures. Spanish Finance Minister Solbes said members of the Spanish government were alarmed by Trichet's recent comments about a potential rate hike, noting that he believes that Trichet's comments were too strong. ECB's Liikanen said overnight that the rise in oil and food prices are impacting incomes, noting that inflation expectations are starting to rise. Liikanen said that the ECB has to be decisive when inflation expectations start to rise. Liikanen added that the Euro Zone is close to a wage-cost spiral, reiterating that the ECB's main task is to get mid-term inflation lower than 2%. The ECB's Stark said that the ECB is not talking about a series of interest rate increases, adding that the ECB will act accordingly to combat inflationary expectations. Stark said that the markets understood the ECB's signal for July, noting that the ECB will do what is needed to anchor inflation expectations. Stark asserted that inflation is starting to hurt economic growth. Elsewhere the Spanish economic secretary Vegara said overnight that an increase in interest rates would increase Spanish economic difficulties.

·In currency trading overnight the USD was mixed compared to its opening levels seen in
Asia ahead of the upcoming G7 meeting in Japan. The EUR/USD was holding below the 1.55-level aided by comments from ECB's Stark who noted that a series of interest rate hikes by the ECB was not planned at this time. Dealers noting of potential political risk with the Irish vote on the Lisbon Treaty on Thursday. At this time the polls suggest an outcome that is too close to call. The GBP/USD was off its session lows after higher jobless and unemployment data for the UK. Cable tested the 1.95 level as the claimant count came in above expectations and the back month was revised higher. The JPY was broadly softer, hitting a 3 month low against the USD. Dealers cited a combination of steady equity markets easing some risk aversion concerns and hawkish comments from the US officials in recent days. Commodity related pairs were a touch firmer in the session as both crude and gold drifted higher. The USD/CAD is holding above yesterday's low of 1.0195, while AUD/USD was crawling back towards the 0.95 area.

·*** NOTES ***

·The ECB's Stark said overnight that the ECB is not talking about a series of interest rate hikes. Stark's comment addresses speculation following the ECB's post rate announcement press conference last week where the ECB's Trichet 'signaled' a rate hike at the July meeting. We have since seen some ECB members reiterate Trichet's signal, however toning down the "hawkishness" by indicating that a rate hike is a strong possibility, but is not set in stone, nevertheless, following months of continual hawkish statements a hike is now widely expected. Stark is addressing any market speculation that the ECB will continue to proceed down a tightening path, seeming to indicate that there is only one rate hike in the cards at the moment. Stark also seems to indirectly indicate that while the ECB is focused on fighting inflation and standing by its price stability mandate, that slowing economic growth in the Euro-Zone cannot be overlooked.

·Following the Bank of Canada's surprise decision to hold interest rates unchanged at 3.00% yesterday the Dollar is a little weaker against the Canadian Dollar. According much of the analysis that has since been published there is a growing consensus that the CAD is likely to gain against the USD in the near term. Some analysts have argued that recent USD gains against the USD were driven by the idea that the Bank of Canada and the Fed's respective interest rate paths would diverge. Following yesterday's rate decision the said analysts now assert that the BOC's decision to hold rates indicates that the BOC's rate setting path will converge towards that of the Fed. Few analysts seem to have taken into consideration that the recent y/y CPI readings in
Canada have been below the key 2.0%. While the Fed is taking on what has been deemed a 'hawkish stance' on inflation (Fed funds futures are pricing in interest rate hikes for 2008), the BOC appears to be taking on a neutral policy stance as inflation is within the central bank's desired range, and growth has not yet taken a devastating hit.

·The Irish vote regarding the Lisbon Treaty is due out tomorrow, and could make or break the finalization and implementation of the treaty. Most simply described by
Ireland's Lisbon Treaty website, the Lisbon Treaty <http://www.> proposes to amend, but not replace, the two main treaties which govern the EU, namely, the Treaty Establishing the European Community (the EC Treaty), the Treaty on European Union (the Maastricht Treaty). If a majority of the Irish voters vote “yes” then the Constitution of Ireland will be changed and Ireland will ratify the Treaty. If all the other EU Member States also ratify the Treaty, then it will come into effect. The Member States have stated their intention to bring the Treaty into effect in January 2009 if possible. If a majority of the voters vote “no” then the Constitution will not be changed and Ireland may not ratify the Treaty. The Treaty will come into effect only if it is ratified by all Member States. The EU would continue to operate under its present rules. (A wealth of information can be found at <>). Essentially ratification of the treaty will create a more powerful, unified, and centralized governing body in the EU area. Arguments against the treaty include the predefined one-size-fits- all figures to be applied for all economic cases, and what some consider a contradiction between the principles of democracy and the practices of the Union. Other arguments note that ratification for smaller EU countries like Ireland, means a radical loss of the voters' influence on the nationally elected EU-bodies, with some opponents arguing that the treaty represents a profoundly undemocratic constitution laying down the foundation of an undemocratic federal state, with the unelected Commission on the top of the decision-making hierarchy. The basic financial implications are that if the vote fails it could result in bearish Euro-Zone sentiment as it would take years to organize something like this again, and the odds are that anything organized in the future would also be met with cold shoulders (remember that in 2005 France and Holland were against ratification of the Lisbon Treaty).


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