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Daily Forex Commentary

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Trichet hinted at hikes

Fri, Jun 6 2008, 07:27 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Yesterday’s main event was the monetary policy meeting in the European Central Bank. Rates were left unchanged at 4% as expected by the majority of market participants however the comments made by ECB president Trichet at the press conference were unexpectedly hawkish. Thus Trichet said that “risks to price stability have increased further” and that there is a good chance that inflation rates will remain elevated. Furthermore he said that the ECB is in a state of “heightened alertness” and reiterated that anchoring of inflation is of the essence. Furthermore Trichet revealed that some members of the Governing Council had opted for a rate hike this month and he stressed that it cannot be excluded that the ECB could raise rates next month.
Euribor futures dropped (the December ’08 contract dropped by a stunning 34 ticks) and in the FX market the EUR jumped from around 154 USD to 155.50 on the statement. In other words Trichet managed to put an effective stop to the strengthening of USD versus EUR that has been gaining momentum earlier this week. We prefer to maintain a neutral stance on EURUSD for now as the currency cross is likely to be the subject of a tug-of-war between the prospects of higher rates in the Euro Zone and the the wish for a Stronger USD on the other side of the Atlantic further potentially explosive events await this afternoon as the all important US non-farm payrolls data will be released.

The NZD tumbled in the wake Wednesday’s rate announcement from the Reserve Bank of New Zealand. Rates were left unchanged at 8.25% but the central bank said that it sees a fair chance of rates being lowered later this year. Furthermore it said that the economy has weakened more than expected and that it cannot rule out a technical recession. As a result of the massive NZD weakening we have reached the target on our selling recommendation on NZDUSD. As the currency cross has managed to break through the long term moving average and momentum indicators suggest that there is further room on the downside we have chosen to extend our selling recommendation targeting 75.40. Momentum on EURJPY and EURCHF has turned bullish in the wake of the massive EUR strengthening that was initiated yesterday. Although we haven’t reached stop loss on our selling recommendations we have chosen to recommend closing down short positions at this point

Emerging Markets

By the Emerging Markets Team

Yesterday the Constitutional Court of Turkey cancelled AKP's decision to allow headscarfs at universities. The decision has not been released yet so it is not possible to assess, what the implications of this decision will be for the pending AKP closure case. It is however one of the more negative outcomes, and the market seemed to think so as well and TRY lost 2.1 % against EUR after the announcement. This adds to the current political risks in Turkey, but it is not clear how must political instability has already been priced in, and hence if there is further downside in the currency. In Brazil the Selic rate was hiked with 50 bps to 12,25 % and the following statements indicated that there are more hikes to come in the future. Indonesia and the Philippines hiked with 25 bps to 8,50 % and 5,25% respectively.

There are no important events on EM today. Instead we will – together with the rest of the financial markets – await NFP from the US. Lately, EM has mostly been guided by general market sentiment. Hence the numbers from the US could be an important indicator of EM performance in the near future. For now we maintain our neutral stance on the currencies.

Today’s Key Events

• 09:00 Trade balance (CZK)

• 09:15 ECB’s Stark speaks on subprime and monetary policy (EUR)

• 10:00 Industrial production (NOK)

• 12:00 Industrial production (DEM)

• 13:00 Unemployment rate (CAD)

• 14:30 Change in non-farm payrolls (USD)

• 14:45 Fed’s Kroszner speaks on financial markets (USD)

• 16:00 Wholesale Inventories (USD)

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Published on  Fri, Jun 6 2008, 07:34 GMT