The waiting has begun

The European short term interest rates took another round in the carousel as the Eurozone CPI flash estimate beat analysts’ expectations. The red Euribor contracts (Sep09 – Jun10) fell around 20 ticks whereas the short sterling futures contracts fell by “just” 9 - 10 ticks. The short term US rates traded more calmly as the market is awaiting ISM manufacturing today and non-farm payrolls thursday.

With the inflation data from Germany in the end of last week and the CPI flash estimate from yesterday, it will surprise a lot of people if the European Central Bank is not raising rates this Thursday. We are in addition to a hike from the ECB expecting a somewhat hawkish Trichet at the following press conference. The market has currently priced in 23-25 bps for a hike this thursday, which essentially means that the hike is fully priced in. The short term interest rates are indicated slightly up in both the Eurozone and the US.


Reserve Bank of Australia, RBA, kept the main policy interest rate at 7.25%. Governor Stevens said in his statement that inflation in Australia has been high in the past year, spare capacity has been limited, and that growth in demand has been strong. The tightening financial conditions are on the other hand working to restrain demand and the outlook for demand and inflation is uncertain due to these opposing forces. The Australian dollar fell versus the US dollar after hitting a new high of 96.68 yesterday.


This Tuesday offers ISM manufacturing and domestic vehicle sales from the US in addition to PMI manufacturing from both the Eurozone and the UK, and unemployment from the Eurozone. The waiting game for Thursday has begun……

A slow start for a busy week

TODAY's COMMENT

Risk aversion was riding high in Friday’s European trading session as concern over rapidly rising oil prices and jitteriness regarding upcoming 2nd quarter results and this week’s flood of macro economic news including the monetary policy meeting in the ECB, the release of the ISM indices from the US and the all important Non-farm payrolls on Thursday. The jitteriness took its toll on EURJPY and EURCHF and as the Russian central bank stated that it doesn’t rule out increasing their share of Swiss Francs in Russia’s forex reserves pressure on EURCHF build. Sentiment does seem to have improved somewhat in the course of Friday’s American trading session. With the Nikkei only slightly down this morning and a macro economic calendar without any ignificant news it looks like we are in for a relatively easy start to the week. Although we don’t expect any drastic moves today we expect pressure on EURCHF and EUR JPY to persist. Thus looking a bit further ahead we continue to see risks mainly to the upside on the JPY and the CHF.

Tomorrow morning the Reserve Bank of Australia announces interest rates and we expect that rates will be left unchanged at 7.25%. Furthermore as the tendency towards weaker macro economic data has continued since the last meeting we believe that the RBA is done raising rates this time around. The AUD has shown a remarkable strength lately and currently AUDUSD is headed for a test of the 96.50-area. Looking a bit further ahead though we believe in a correction lower on the currency cross but as the timing for a selling recommendation seems off for the time being we prefer to maintain a neutral stance.

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