To raise or not to raise that’s Trichet’s question

It’s all about the ECB’s press conference today with investors’ listening intently to see if Trichet uses the term “strong vigilance” and thus signals a rate hike as early as June. This is make-or-break for the euro and it could see EURUSD break through the key 1.50 level if Trichet is on the hawkish side. However, if he steps away from near-term rate hikes (unlikely in our opinion) then this may spur a sharp pullback in the single currency. Either way, investors should expect volatility in the FX markets around 1330 BST/ 0830 ET.

In contrast the Bank of England is expected to remain on hold for another month as the market reduces its expectations of a rate hike. Ever since Mervyn King spoke in Europe on Monday and said that high debt levels make it necessary to keep monetary policy loose (read the MPC’s predicament right now) UK yields have come under pressure. The icing on the cake for low rate expectations was today’s services sector PMI data, which followed manufacturing and construction readings lower and fell to 54.3 last month from 57.1 in March.

The market now expects just 21 basis points of tightening this year, and after a slow start to Q2 economic data the chances are that rate hike expectations could be pushed out even further. This leaves the UK and US as some of the only developed world central banks who are keeping monetary policy loose.

This will keep the pressure on the EURGBP rate. GBPUSD looks very comfortable above 1.6000 in our opinion and the downside versus the buck will be dependent on the Federal Reserve and how quickly it shrinks its balance sheet once QE2 comes to an end next month.

The euro has come off this morning on the back of weak factory orders out of Germany and also a disappointing Spanish debt auction. Spain sold EUR3.4bn of 5-year bonds, less than originally intended and its borrowing costs also rose. The average yield was 4.549 per cent, versus 4.389 per cent at the last auction on March 3rd.

Portugal’s aid package from the EU and the IMF has been confirmed and a lot of headlines are hitting the wires. There are calls for harsher budget cuts before aid is agreed, led by Germany and there is still a risk that the Finns won’t support the aid package at all. Right now the focus is on Trichet, but if the Portuguese bailout gets messy then it could dampen sentiment towards Spain, which is bad news for the single currency.

Although we think that Spain has distanced itself from the other bailed out peripheral nations, pressure remains on its financial position. Obviously raising interest rates is not in the interest of the weaker peripheral economies through higher borrowing costs and also a stronger exchange rate that could weigh on exports. Trichet may choose to take into account the pockets of economic weakness in the monetary bloc, but overall, we expect him to remain hawkish as wage pressures remain elevated in particular in Germany, the Eurozone’s largest economy.

The dollar is trading with a downward bias again today. The most notable casualty is USDJPY, which is back below 80.00. Surely this is intervention territory? Yet all seems to be quiet in Japan, where there is a week-long public holiday. So there is a potential for intervention risk next week, when they are back.

The weak tone to the dollar is no longer pushing up commodities that, like FX, are trading in line with global monetary policy. The convergence between emerging and developed market central banks who are adopting a hawkish stance (bar the UK and the US) is weighing on global growth prospects and pushing down commodity prices.

Brent crude is currently trading below $120 per barrel. As more central banks adopt a hawkish stance then the threat of inflation is reduced, which is also weighing on demand for safe havens like gold and silver, both of which have come off sharply this week. Silver is back at the $38 per ounce mark, a near $12 drop in a week. After outperforming gold this year the tables have turned and gold is not falling as sharply as the grey metal.

The Aussie is also under pressure today and AUDUSD is back below 1.0700 after weak retail sales data and the fall in commodity prices. It is currently testing support at 1.0670; below here we may see back towards 1.0500.

Although employment data in New Zealand was better than expected the Kiwi has followed the Aussie lower.

Ahead today the market looks like it is getting ready for Trichet and we expect that to be the game changer today. But then there’s payrolls tomorrow that could change everything once again.

Источник: Forex.com

05.05.2011