So the day(s) of the central bank meetings are upon us. As expected, trading has been somewhat subdued leading up to these larger event risks. But there were still plenty of opportunities to secure positions prior to these events.
The U.S. has already had their day in the sun, announcing an unchanged rate and no substantive change in the accompanying text, leading some to speculate that there will likely be no rate cut for the remainder of this year. I'm not so certain, however, with the household NFP numbers last week appearing much worse than the headline number portrayed and overall weakness evident throughout much of the report. As is usual, more data is necessary to determine a more accurate outlook - and the Fed will now have another 1.5 months or so of data to examine before rendering their next verdict. Overall, it was probably wise for them to take the stance they took.
Next, the BoE is scheduled to release their verdict within the next few hours. Most believe a 25 basis point hike is expected (and is already fully priced in). A few speculate that we may see a 50 bp hike. But given that the BoE is likely near the top of their hiking cycle and with recent data suggesting a plateau is in sight, I figure this is probably very unlikely - particularly if their inflation projections (also due today) continue to indicate a sharp drop in inflation in the coming months.
The ECB is also due to release their verdict shortly after the BoE, and although Trichet is expected to keep rates steady this month, he is expected to signal a hike in June using his normal cryptic rhetoric. Why do they get off on code-words, anyway? Just tell us and be done with it! Either you are pregnant, or you aren't - there's no halfers!
Technically, there is scope for large moves higher on cable and euro for the rest of this week if the BoE hikes and indicates another hike is probable (and/or if their inflation forecasts are revised higher), and if Trichet uses his "strong vigilence" code-phrase to signal a hike is expected next month, AND if U.S. retail sales on Friday comes in weaker than expected. The likelihood of all of these things conspiring against the dollar at one time is not likely, but it is also not entirely improbable.
It is interesting that the other major U.S. currency pair (dollar/yen) may be affected by comments by Fukui who stated that keeping interest rates very low may cause overinvestment. Although no one can be sure, his "tilted" comments were definitely towards a hawkish bias - which I am certain the carry traders are eyeing closely.
All of this could conspire towards an air of dollar cautiousness, which would support my longer-term bullish belief that cable (and euro) should rise. Technically, there is scope for a rise towards 2.0386 (see the chart) during the next couple of weeks, but of course only if the data proves supportive. The move higher may not occur this week, as a rate hike by the BoE is already fully priced in. But with inflation data due next week, a friendlier US inflation number-sequence could restart the cable trend higher.
The rest of May will be interesting indeed.
05-10-2007, 03:57 AM
Week 19
Linear Mode
