Tuesday November 22, 2005 - 09:51:53 GMT
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Mellon Bank Foreign Exchange - https://fx.mellon.com/
Forex: Mellon FX Daily - European EditionKey Points
• What exactly is Trichet trying to tell us?
• Overall, recent ECB developments have been negative for EUR-USD compared to prior expectations.
• UK CBI survey, Canadian CPI feature today.
So what has Trichet
been trying to tell us over the past few days? First of all, rates will be going up by 25bp on December 1. There appears to be little dispute about this particular signal. However, he has had some trouble communicating what will happen after that, which is perhaps not surprising given that he cannot fully anticipate a) what the data flow will be in the months ahead or b) how the 17 other members of the governing council will react to that data. On Friday, he said that rates should be ‘augmented moderately’ and yesterday he said it ‘would not be a good working assumption
to consider that we are at the start of a series of interest rate increases’. This last statement does not necessarily rule out additional rate hikes in Jan, Feb or Mar. All he is saying is that it would be wrong to assume in advance that this will happen. He is leaving all options open, but clearly at this stage there does not appear to be an established ECB consensus about what will happen to rates beyond December and this in itself leaves the market on slightly fragile ground given how much has been discounted already.
This is perhaps the key development over the past few days. Trichet may have confirmed that rates are going up, but the overall message has been dovish compared to the consensus previously in place and is if anything a negative development for the EUR.
This maintains a downside risk to EUR-USD, especially as many weak shorts will have been skittled out through Friday and Monday morning – a healthy development for potentially empowering a fresh move lower. The one complication is Thanksgiving and the fact that the market may also want to see whether Trichet offers up something different at next Thursday’s post-meeting press conference. This may buy some time forEUR-USD,
although the risks still point to a possibly large sell-off in December as the recent trend continues. 1.1850-1.1900 should prove to be a firm cap to trading up to the ECB meeting, while 1.1640, 1.1590 and 1.1500 are the key barriers to further very negative developments.
the monthly CBI survey of manufacturing is released and the orders component has been on the soft side since Q1. Output price expectations have also been subdued – consistent with the steady performance in core PPI output.
the BoC’s preferred core measure of CPI (CPIX) has been below 2% since 2003 and as long as this remains the case they will not feel under any pressure to quicken the normalisation of interest rates currently underway.
Data/event EDT Consensus*
FR H’hold consumption (Oct) m/m 07.45 0.0%
GB CBI manu trends survey (Nov) 11.00
CA CPI (Oct) y/y 12.00 +2.9%
CA CPIX (Oct) y/y 12.00 +1.8%
US Chain store sls (w/e Nov 19) w/w 12.45 -0.6% last
EU ECB’s Wellink spks 13.00
NZ Business confidence (Nov) 13.00 -54.9% last
US Redbook sls (w/e Nov 19) m/m 13.55 +0.2% last
US Minutes of Nov 1 FOMC 19.00
US ABC consumer conf (w/e Nov 20) 22.00 -18 last
Latest data Actual Consensus*
JP Tertiary index (Sep) m/m -0.7% -0.4%
JP All-industry index (Sep) m/m -0.4% -0.1%
DE GDP (Q2, 2nd est) q/q +0.6% +0.6%
* Consensus unless stated
2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005
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