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Forex Market Update: OPEC Unexpectedly Cuts Production -- US Dollar Holds On

Wednesday, 10 September 2008 07:32:36 GMT

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Written by David Song, Currency Analyst

The USD has settled to a consolidation, aided by a backdrop of steadier yield differentials that suggest that the U.S. versus slowing global economies theme has perhaps been quite well factored in for now.

Economic Events 09/10/2008

06:04 GMT - BoE's Gieve stressed that a sharp economic downturn is required to bring down inflation in line with the 2% target. In a newspaper interview with the Irish News, Gieve, who has voted with the majority for a steady hand since May, said that CPI, at 4.4% in July, "certainly hasn't peaked yet" and warned that inflation is likely to rise further and to stay at elevated levels "for several months" after that. He stated that the MPC is aware of the risk of causing unnecessary slowdown to the economy but stressed that the central bank has to ensure that high inflation does not become embedded in the economy through a "5 percent mindset". Hawkish rhetoric indeed, suggesting that Gieve is not about to sway to join Blanchflower's dovish camp and indicating that BoE rates are likely to remain steady throughout the year.

06:17 GMT - Bund futures are lower in early trade, in line with Treasuries and as OPEC unexpectedly announced a cut in output that could add to inflation pressures. Technically the upturn trend remains intact though and with stock market futures down there could be some support later on. As of 6:15GMT the December 10-year Bund future is down 17 ticks at 114.91. The 10-year Bund yield is up 2 bp at 4.05% and the 2-year yield up 1 bp at 4.01%. In the money markets the Dec 3- months Euribor future is down 0.005 at 94.950 and back months futures are also lower.

06:51 GMT - French July industrial production rose 1.2% MoM, with manufacturing production up 1.5% MoM. This was much stronger than our median of 0.4% for industrial production and mainly due to a jump in automobile production, after two consecutive months of decline. Construction production rose 0.2%, after rising 0.5% in June. The rebound in overall IP comes after two months of contraction, and annual rates are still firmly in the red at -2.0% YoY for production and -2.3% YoY for manufacturing. However, data are nevertheless backing those that do not expect a recession in the Euro-Zone and will add to the arguments of the hawks at the ECB, who remain firmly focused on inflation risks. The strong release added to pressure on Bunds this morning.

06:56 GMT - France posted a July s.a. trade deficit of EUR 4.8B, up from a deficit of EUR 5.4B in June. Exports rose 0.3% MoM, while imports declined 1.0% MoM in July. The narrowing in the trade deficit together with reports of a marked rebound in industrial production at the start of Q3 is good news for growth trends.

Forex Market Highlights

The USD has settled to a consolidation, aided by a backdrop of steadier yield differentials that suggest that the U.S. versus slowing global economies theme has perhaps been quite well factored in for now. OPEC's unexpected decision to cut production, which came overnight, hasn't had a big impact on oil prices thus far, but could still during European and U.S. sessions, especially if today's EIA crude inventory report were to show any weakness; so an eye should be kept on the oil market today. Meanwhile, the fate of Lehman Brothers will be very much on the radar screen, with the bank to announce "key strategic initiatives" later today amid a swirling pool of rumors and possibilities.

9-10 FXU

 

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