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BoE Unchanged, US Jobs Remain Focus

Thu, Apr 5 2007, 14:27 GMT
by Ashraf Laidi

CMC Markets

The Bank of England left interest rates unchanged at 5.25%, in line with our forecast yesterday. Sterling dropped lower on the decision, before stabilizing around the 1.9720s. We noted yesterday that the BoE’s Monetary Policy Committee’s inflation preoccupation with inflation was starting to recede, driven partly by expectations of receding price pressures in the medium term. This was also supported by a widely inflation-comfortable testimony to Parliament by 6 MPC members last week.

Today’s 8:30 am release of weekly jobless claims is expected to show a rise to 315K from 308K, lifting the 4-week average to 316K from 317K.

Yesterday’s 106K reading in the March ADP private payrolls, supports consensus forecasts for 130K in March non-farm payrolls due tomorrow.   We expect non-farm payrolls to rise to 115K from 97K and the unemployment rate to rise to 4.6% from 4.5%, while average hourly earnings slowing to 0.3% from 0.4%.

Thursday’s services ISM showed its lowest headline figure in 4-years at 52.4, with the the employment index falling to 50.8 from 52.2, its lowest level since July 2004. We already saw the employment component of the manufacturing ISM dipping back into contraction territory at 48.7 to show 5 months below 50 out of the last 7 months. This augurs badly for Friday’s payrolls, especially with the 3-month average in manufacturing, construction and services all heading lower. In fact, the 3-month average in services jobs fell to 173k, the lowest since August. Nonetheless, the improvement in the weather factor expected to help construction jobs is behind our forecast for a pickup in total net payrolls.

China 's central bank increased banks’ reserve requirement by another 0.5% to 10.5% today, making the 6 th increase over the past 10 months. This follows last month’s 27-bp rate hike, which is part of a continued effort to contain liquidity and inflation. These market measures may also be designed to demonstrate to the rest of the world that Beijing is making concerted efforts to slow growth, rather than enjoying a free lunch at the expense of its Western trading partners. The Chinese yuan   has now risen by 6.7% against the USD since July 2005, including the 2.1% revaluation.

Sterling regains composure after BoE rate hold

Sterling regains composure above the 1.9710-20 territory following a knee jerk reaction decline to 1.9675 from 1.9730 after the Bank of England decision to keep rates on hold. While a rate hike in May cannot be ruled out, expectations remain tilted towards no move. We expect a retest of the 1.9670 support, which is the trend line extending from the 1.9210 low of March 14. Subsequent foundation seen at 1.9650, which is the 61.8% retracement of the 1.9546-1.9817 rise. Upside seen limited at 1.9760, but a pick up in the US weekly jobless claims above 325K may push up the pair towards 1.9780s. Key resistance remains capped at 1.9820.

The 0.6% decrease in UK February manufacturing output undershot expectations of a 0.3% rise, dragging sterling before the interest rate decision. Industrial output fell 0.2% m/m and slowed its rate pf annual growth to 0.3% from 0.4%. The data followed a pickup in the PMI figures on construction, services and manufacturing seen earlier this week, as well as the CBI survey showing manufacturing orders rising to a 12-year high lat month. There was also no let up in home price growth after, house prices gained 1.8% on the month and 9.9% as reported by mortgage lender Halifax.

USDJPY to stay in range

Quiet trading continues in the pair around the 118.55-80 range, with the attention shifting onto European FX and antipodean currencies. After proving the 119.20 resistance to be of notable strength, the 118.50 trend line extending from the March 28 low has proven to be just as effective. Interim resistance stands at 118.90, followed by 119.20, which is just above the 55 day moving average as well as the 61.8% retracement of the 121.62-115.15 decline.

EURUSD seen capped at 1.3380 until Friday

EURUSD edges up to 1.3370 as EURGBP advances from yesterday’s 67.60s to 67.80 following the BoE decision. We expect EURUSD to remain near the higher end of its trading ranges, until Friday’s payrolls. A drying up of trading volumes may contribute to volatility, which may make 1.34 a possibility, especially in the case of a rise in the US unemp rate. Expect support to firm at 1.3360, backed by 13330.

Today’s BoE decision carries the potential to steer EURGBP to the 67.90 pence figure, but resistance remains weighty at 68.05.

Loonie flies on stellar jobs

The Canadian dollar dragged its US counterpart by nearly a full cent to 1.1523 after Canada created a a net increase off 54.9K jobs last month from 14.2K, overshooting expectations of 15K. The unemployment rate remained unchanged at 6.1% . USDCAD eyes the 1.15 figure, defying the decline in oil prices. We expect support to emerge at 1.1475-80, just above the 50% retracement of the rise from the Sep low to the Feb high.

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Published on  Thu, Apr 5 2007, 14:27 GMT