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Friday April 7, 2006 - 10:13:39 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Trichet douses EUR flames.
• Further EUR pullback likely in the short-term as change in tone weighs on positioning.
• US and Canadian employment data feature today.

Market Outlook

A real slap in the face for the market from Trichet yesterday, in one sentence snuffing out the hopes of a rate hike as soon as May. The comment ran counter to the signals recently sent via media channels and reflects two possible factors. One is that recent signals have been sent by an element of the ECB that does not represent the majority. In other words, the whole episode reflects divisions within the council, which serves as a reminder as to how unwieldy the ECB is an organisation due to it representing so many different countries. Two, is that they may be wary of providing further fuel to the rally in EUR-USD. The ECB has maintained all along (and repeated yesterday) that a long-term risk to growth is the correction of global imbalances and there are two aspects to that threat – a weaker USD/stronger EUR as well as the impact of a weakening in US domestic demand (which a narrowing US current account deficit would probably reflect). Concern about EUR-USD strength is therefore only natural.

A May rate hike cannot be ruled out entirely - the ECB could always change its mind over the next few weeks. However, this is highly unlikely. Their credibility would be very low if they were to act in May after the starkness of yesterday’s signal. A 25bp hike in June alongside their mid-year forecast update should now be the next move.

Overall, the case for monetary tightening remains in place and on the basis of the comments Trichet made yesterday about the economy, the liquidity backdrop and inflation risks, a rate hike could have been justified immediately. However, for whatever reason the ECB is not ready to shift gear and this removes a key potential driver for a EUR-USD rally over the next few weeks. A sustained break above the 1.2320-30 area now looks unlikely unless there are some disappointing data developments in the US. Given the turnaround in sentiment compared to yesterday, EUR-USD looks set to give up more ground today, with 1.2120-30 a possibility, depending on the tone of the US employment report. EUR crosses are also likely to retreat further for a short while, although the basic arguments favouring EUR remain in place and renewed strength will be seen at some point. Trichet also speaks today but it would appear that everything has now been said.

Day Ahead
Canada – employment data is due and while total employment appears to have been advancing well over the past couple of months, there was a sharp reverse in the full-time component last month. It will be interesting to see whether this has been reversed. 1.1500-15 is major short-term support on USD-CAD.

US – employment reports have not been that exciting over the past year or so, apart from the noise that was seen around the time of the hurricanes. The market has much anticipation ahead of the releases, but there is generally little reaction on the outcome itself. Last month saw a stronger than expected rise in non-farm payrolls for February of +243k, but this was offset by a downward revision to January (from +193k to +170k). If the February rise was anything meaningful a 220k plus rise will be needed in March. Snow’s comments earlier in the week about the likely strength of today’s report were unfortunate, although he was probably just speaking generally about the likely performance of the labour market rather than giving a heads up on the exact figure itself.

Data/event EDT Consensus*

EU ECB’s Trichet speaks 06.15
CA Employment (Mar) 07.00 +22.6k
CA Unemployment rate (Mar) 07.00 6.4%
US Non-farm payrolls (Mar) 08.30 +190k
US Unemployment rate (Mar) 08.30 4.8%
US Average workweek (Mar) 08.30 33.8
US Hourly earnings (Mar) m/m 08.30 +0.3%
CH SNB’s Hildebrand spks on policy & markets 11.00
US Consumer credit (Mar) 15.00 +$2.8bn

Latest data Actual Consensus*
AU Housing finance (Feb) m/m +1.1% +0.5%
CH Unemployment rate (Mar, sa) 3.6% 3.5%
DE Trade balance (Feb) €13.1bn €13bn
DE Current account (Feb) €11bn €6.4bn
DE Exports (Feb) m/m +4.6% +0.5%
NO Manu output (Feb) m/m -1.4% -0.5%
* 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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