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Thursday April 6, 2006 - 11:08:29 GMT
Mellon Bank Foreign Exchange - https://fx.mellon.com/

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD looking strong and further gains look likely in the weeks ahead.
• But some consolidation may be seen ahead of tomorrow’s US employment report if Trichet fails to fuel the policy fire any further today.
• The ECB is probably satisfied for now with the way market expectations have developed.
• Australian labour market data not as strong as it looks, but AUD still looks fairly good.
• UK MPC meeting should be a non-event.

Market Outlook

The EUR remains strong and this is weighing on the USD in general, with EUR-USD having intermittently traded above the January high of 1.2322. If it can hold on to such developments it will focus market attention on a possible test of the key area at 1.2600-1.2730, although it is not abundantly clear that Trichet will offer any more hawkishness today than is known already (see below for full preview of ECB meeting). On this basis there could be some consolidation seen before a further major push higher is seen (also note that the US employment report is still to come tomorrow) but there is a clear risk of such strength over the next week or so.

Recent EUR-USD moves are not just about the attributes of the EUR, but the possible failings of the USD. The market has for most of this year been mindful of the likelihood that at some point US rate arguments will lose their lustre and negative balance of payments arguments will take over. Indeed, such sentiment drove the move to 1.2322 back in January. This proved to be something of a false start, with US rate expectations having risen since then, but the sense that the US rate story is drawing to a close has never been far from the surface. This makes the market more prone to jump into alternatives and the ECB rate story is proving to be such an attraction.

As it currently stands, the US rate story may yet run for longer than the market currently believes and at some point there may also be some pullback or brake on the development of ECB rate hike expectations. However, for now the arguments look pretty solid and such momentum is likely to leave EUR-USD in the ascendancy for the next few weeks at least. Most probably this will be until the May 4 ECB meeting, which is also when the May 10 FOMC will come into sight. How the market views that FOMC event will be driven by the tone of the US data between now and then.

Another round of decent data out of Australia adds further to arguments about a possible rate hike over the next few months. A number of data releases appear to have pulled out of the flat patch that has been in place since the middle of last year and rate expectations are starting to follow suit. However, last night’s labour market data is not without qualification, as the 27k rise in total employment was more than accounted for by a very strong 39.5k rise in part-time employment – full-time employment actually fell 12.4k. However, the fall in the unemployment rate to 5% (a joint record low with the Jun-Aug period last year) should help consumer confidence. Such lopsided outcomes on the full and part-time employment categories are not uncommon, but a possible explanation is the temporary jobs created by the March Commonwealth Games in Melbourne. However, state data shows that employment gains were outside the state of Victoria, so it would appear that job creation related to the Games was in prior months. This would be consistent with the performance of part-time employment in the run-up to the Sydney Olympics in 2000.

Medium-term prospects for the AUD still look reasonably good (with gold having risen further) and what is clear after recent developments is that the domestic data will be much more of an argument in how the AUD now performs. However, after recent strength there is likely to be some consolidation before the market takes a closer look at 0.7385-0.7410. Below 0.7260 would suggest a pullback to 0.7215-20. Housing finance data is due tonight.

Day Ahead
Eurozone – the ECB meeting and press conference is the main feature but after the messages sent in recent weeks and the lack of effort on the part of ECB officials to counter the development of higher interest rate expectations, their job appears to have been done for now. All Trichet needs to do is to reiterate that the ECB will be absolutely determined to remain extremely vigilant about pre-empting any inflation risk and that recent data developments e.g. very strong private sector lending, only increase the need for such vigilance. This will confirm what the market has now adjusted to i.e. a 25bp May rate hike, plus the impression that another hike will follow in July or even June. Indeed, it will also beg the question as to why they are not raising rates today, which is still a risk perhaps despite the Market News story from earlier this week implying that the move would not be until May.

For the time being Trichet will probably not want to be too aggressive as market rate expectations have already moved satisfactorily as far as the ECB is concerned. There is probably little upside to stoking the fire even further at this stage. For example, they probably have little interest in sparking any additional rally in EUR-USD.

UK –the MPC meeting is likely to leave rates unchanged and there will be no statement, so it should be a non-event. The minutes will be released on April 19. However, the damage has been done as far as GBP is concerned, with EUR-GBP closing above 0.7000 yesterday. This should ensure more upside testing in the short-term and while there could be some consolidation ahead of the Dec 04 and Jan 05 highs of 0.7108 and 0.7040 respectively, it is difficult to see the news flow switching back in favour of GBP over the next couple of months. In this regard, general upside risk will remain in place. If and when 0.7108 does break it would expose the 2003 highs at 0.7250 and 0.7350.

US – weekly jobless claims is the only data feature in the USand it appears to have stabilised a little after recent volatility. The USD could be mildly sensitive to further swings in the data today but as it appears just as Trichet is about to deliver his opening address at the ECB press conference, the market will most likely be focused on bigger things.

Diary
Data/event EDT Consensus*

GB MPC rate announcement 07.00 4.5%
EU ECB meeting outcome 07.45, press conf 08.30 2.5%
CA Building permits (Feb) m/m 08.30 +0.2%
US Initial claims (w/e Apr 2) 08.30 305k
US Continuing claims (w/e Mar 25) 08.30 2483k last
NO Norges Bank’s Gjedrem speaks 09.00
CA PMI (Mar, nsa) 10.00 62.0
AU Housing finance (Feb) m/m 19.30 +0.5%

Latest data Actual Consensus*
GB NIESR GDP (3mths to Mar) q/q +0.6% +0.7% last
AU Employment (Mar) +27k +10k
AU Unemployment rate (Mar) 5.0% 5.2%
GB HBOS house prices (Mar) m/m +0.9% +1.4%
NO Unemployment rate (Mar, nsa) 2.9% 2.8%
NO Unemployment rate (Jan, sa) 3.9% 4.1%
*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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