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Euro Remains Bid As Market Looks Ahead to ECB Rate Hike

By Kathy Lien
23 November 2005 21:46 GMT
***NEXT RELEASE WILL BE ON MONDAY NOV 28TH***

•    Euro Remains Bid As Market Looks Ahead to ECB Rate Hike
•    BoE Centers Focus on Wage Growth
•    Yen Rallies as BoJ Tries to Exert Independence

US Dollar
It is the day before the Thanksgiving holiday here in the US and most dealers are thinking more about their long trips home than taking new positions in the markets.  We have been seeing quite a bit of profit taking across the board in dollar pairs as the market gears up for two days of illiquid trading.  There were a sprinkling of releases out from the US today including mortgage applications, jobless claims, the University of Michigan consumer confidence survey and the help wanted index.  According to the mortgage applications data, which saw a 3.4 percent fall in applications, the housing market continues to show signs of weakness.  The labor market will be a big focus next week with non-farm payrolls due for release on Friday.  Today, we saw the first hints of how the market may have been performing.  Jobless claims ticked higher to 335k from 305k.  According to the BLS, 10k of that rise was probably attributed to the Hurricanes.  The help wanted index for the month of October remained unchanged at a downwardly revised 38.  Despite the modest disappointments, the optimism for November payrolls is high.  After the sharp disappointment reported last month, analysts once again expect over 200k jobs to have been created last month.  Analyst estimates have been so off recently that they have become virtually unreliable.  However, surveying the economy, it does appear that growth is picking up as well as the rebuilding efforts for Hurricane laden regions, which could help to boost payrolls.  Aside from NFPs, there are a number of other pieces of data worth watching including durable goods, consumer confidence, GDP, Chicago PMI, the Beige Book and ISM.  All of this should provide us with more insight into how long the Fed plans on maintaining their aggressive tightening cycle as well as inject some more volatility into the currency markets.

Euro
With only Eurozone industrial orders and Italian consumer confidence released this morning, focus for Euro traders continue to be the imminent rate hike next week.  Both industrial orders and consumer confidence came out stronger than expected, but neither did much to bolster the Euro.  Instead, profit taking remains the predominant theme as US traders square up ahead of the holiday.  However, for the rest of this week and most of next, one of the big topics on the mind of FX traders will be the ECB’s first rate hike in 2.5 years expected on Thursday.  Now judging from the recent comments by ECB officials, the rate hike itself seems to be a near certainty.  High energy prices have increased inflationary pressures, but the real question will be whether the central bank follows up with a series of hikes or not.  According to comments by ECB Wellink this morning, rate hikes come in small steps and the central bank wants to be very careful not to over hike such that they are then forced to lower rates shortly afterwards.  Quaden confirmed our perception that the ECB believes that slow and steady wins the race, as he compared the central bank’s first move to “taking the foot off the gas rather than slamming on the brakes.”  Overall, it seems that the ECB wants the market to believe that they will keep monetary policy accommodative after the hike so that growth continues to improve. 

British Pound
The main focus today was the minutes from the most recent Bank of England Monetary policy meeting.  According to the report, the latest decision to keep interest rates unchanged was based on a unanimous 9-0 vote.  There was a minority group that believed one person could have voted in favor of a rate cut.  If this was true, it would be perceived as a bearish signal for the British Pound.  Instead, the unchanged view validates the general belief that the MPC is really taking one step at a time and watching the trend of data very closely before determining their next step on rates.  The report indicated that views diverged tremendously within the BoE.  Some members saw weaker growth for the second half of the forecast period while others saw stabilization or improvements.  It certainly doesn’t help that data released thus far has been very mixed. The main focus seems to be on wage growth.  BoE Walton said today that the central bank will focus the path of interest rates on wage settlements.  So this too, will be one of our main focus as we assess data in the weeks and months ahead.

Japanese Yen
The Japanese Yen has weakened for the third consecutive trading session with the USDJPY currency pair showing signs of rolling over.  The Japanese markets were closed today, so most of the move was probably related to overall profit taking.  Comments from Bank of Japan Governor Fukui did cause a bit of jitter as he downplays recent comments by Prime Minister Koizumi.  Fukui warned that the BoJ alone would decide when to end their zero interest rate policy and not anyone else.  This takes a direct stab at Koizumi’s rare comments on monetary policy last Monday.  In a question and answer session, the Prime Minister had said that he thinks “it may be too early” to end the BoJ’s quantitative easing.  It remains to be seen whether the BoJ can be truly independent. 






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23 November 2005 21:46 GMT