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Friday May 5, 2006 - 10:36:54 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Does Trichet’s use of the term ‘strong vigilance’ as opposed to ‘vigilance’ mean a 50bp rate hike in June?
• The formation of such an expectation would be another positive for EUR-USD, but consolidation may yet be seen ahead of next week’s FOMC.
• Swiss rates have also been heading higher of late (seemingly unchallenged).
• RBA statement takes the edge off rate expectations.
• Canadian and US employment reports feature today.

Market Outlook

There were two important aspects to Trichet’s press Conference yesterday. First of all, it was a case of what he didn’t say. He failed to make any major protest about the ongoing strength in EUR-USD, other than to say that the recent G7 statement was “not, in any respect, sending a message that would call for a change in our relationship with the US dollar”. Also, when pressed about the prospect of a more aggressive rate rise in June he failed to play down such talk. This could just be a case of ‘no comment’ that carries few connotations, but the second point (discussed below) also suggests the possibility of a 50bp move in June.

The second point concerns the use of the word>b? ‘vigilance’. The media has already extensively covered the fact that this probably means a June rate hike, which the market had already discounted. However, he used the term ‘strong vigilance’ yesterday as opposed to just ‘vigilance’. Is this significant? He has not used the term ‘strong vigilance’ since the October and November press conferences, which with the benefit of hindsight were probably clear efforts to push the market into taking on board the December rate hike, which was not being discounted at the time of the Oct/Nov meetings. The word vigilance was not used in December and was only used again at the February meeting (just ‘vigilance’ on that occasion) to flag the March rate hike that was already discounted. In sum, does the ‘strong vigilance‘ terminology used yesterday mean he is trying to flag an outcome in June that is not currently anticipated i.e. a 50bp hike. A faster pace of tightening would certainly be consistent with his other comments yesterday about the strength of economic activity and credit growth and the upside risks to inflation, in addition to the fact that rates remain at very low levels. There is always a danger of reading too much into these statements, but Trichet does seem to be playing ball with the word vigilance. The next ECB bulletin and other comments from ECB officials (Weber said this morning that all options remain open for June) will be closely watched, but a 50bp hike in June is a distinct possibiity.

Also note that the SNB has tolerated a sharp upmove in 3-m money in recent weeks, perhaps sooner than one would expect if they were merely planning a 25bp hike at their next quarterly policy review in June. They too could be planning a 50bp move, which would also be consistent with the data and the more hawkish comments from SNB president Roth seen last week. 􀃆

If such expectations do start to form in the market this would pose an additional challenge for the USD, leaving risk of more weakness in the medium-term. However, 1.2730-75 has still to break on EUR-USD and there could be some further consolidation until next week’s FOMC meeting (on Wednesday rather than the normal Tuesday) is out of the way. Today’s US employment report will need to be unusual to change the market’s mindset on the US economy.

The AUD slipped back after the RBA policy statement. They left their forecast for underlying inflation unchanged and said the latest rate hike should serve to keep it inside the 2%-3% range. Further rate hikes are not necessarily ruled out but will need to be justified by further unexpected strength in the data. With gold strong and the USD generally weak, there is still much support for the AUD although there would be a risk of slippage to 0.7600 if corrective activity is seen on other USD rates. 0.7750 is the main barrier to further gains.

Day Ahead
Canada – labour market data is due and while the headline employment number has been fairly solid over the past few months, there has been a lot of volatility in the full-time and part-time employment components (full-time up 44k last month after a fall of 31.6k in the previous month). Weak data will be required to reduce the risk of another BoC rate hike.

US – the employment report is today’s main feature and another solid outcome looks likely. A new employment measure (ADP National Employment Report) released on Wednesday, said that 178k were added to payrolls in April and that the average monthly add in the first four months of the year had been 200k. This survey claims to have a correlation of 0.9 with the actual m/m % outcome (1.0 being perfect) and less of an average miss than the market median. It will take something unusual to move the market.

Data/event EDT Consensus*

CA Employment (Apr) 07.00 +15k
CA Unemployment rate (Apr) 07.00 6.3%
EU ECB’s Trichet speaks 07.00
EU ECB’s Weber speaks 07.30
US Non-farm payrolls (Apr) 08.30 +200k
US Unemployment rate (Apr) 08.30 4.7%
US Average workweek (Apr) 08.30 33.8
US Hourly earnings (Apr) m/m 08.30 +0.3%
US Consumer credit (Apr) 15.00 +$4.1bn

Latest data Actual Consensus*
AU Building approvals (Mar) m/m +2.2% +1.0%
AU Trade balance (Mar) -A$1.5bn -A$1.3bn
* 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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