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Daily Forex Strategy Briefing

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FOMC Softens Tightening Bias

Thu, Mar 22 2007, 02:33 GMT
by Hans Nilsson

CMS Forex

• The dollar fell broadly against major currencies on Wednesday after the Federal Reserve policy makers kept the benchmark interest rate at 5.25% and unexpectedly softened their tightening bias. The carry trade funding currencies that showed some weakness against the dollar were the yen and Swiss franc.

• The EUR/USD rose marginally above its December 2006 high to the highest level since early 2005. The pair is at significant resistance. It this resistance is broken, it will be bullish for the euro.

Financial and Economic News and Comments

US & Canada
• The Fed kept its key interest rate at 5.25% as expected and softened its bias toward raising interest rates. The FOMC said it will be data dependent and acknowledged signs of a worsening economy and higher price pressures. The Fed still is worried about inflation and we do not expect any rate drop unless the economy falls into recession.

• The FOMC said: “Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters. Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

• Canada’s index of leading economic indicators rose 0.7% in February, led by gains in stock prices and manufacturing, Statistics Canada said. The LEI index rose 0.4% in January.

• Canadian retail sales fell 0.2% in January, retreating from the biggest monthly gain in 4-1/2 years in December as automobile and gasoline transactions fell.

Europe
• The Bank of England policy makers voted 8-1 to keep the benchmark rate at a 5-year high of 5.25% this month. David Blanchflower unexpectedly made the first call for a rate cut since May. The Monetary Policy Committee said that some inflation risks have diminished and a rate increase this month may have roiled financial markets already hurt by a global sell-off, minutes of the March 7-8 meeting showed today.

• European Central Bank President Jean-Claude Trichet said in a speech to the economic and monetary affairs committee of the EU Parliament today that the eurozone economic growth continues to be “robust.” He warned inflation may accelerate toward the end of the year. “The outlook for price developments over the medium term remains subject to upside risks,” Trichet said.

Asia-Pacific
• Australia’s index of leading economic indicators rose in January, signaling the economic expansion and raising prospects of higher interest rates. The LEI index rose 0.1% to 244.4 from December, Westpac Banking Corp. and the Melbourne Institute said. The index’s annualized growth rate was 4.8%.

• South Korea’s Q4 GDP expanded a revised 0.9% q/q, the Bank of Korea said. The economy grew 4% from a year ago.

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Published on  Thu, Mar 22 2007, 02:35 GMT