NEWS / Foreign Exchange

Euro Unfazed by Trichet's Tactical Change

Although Mr Trichet left out the word "vigilance" in signaling the bank's stance on inflation surveillance, his stance on inflation remains unequivocally hawkish as he said the bank will "very closely monitor" prices developments and will act in a "firm and timely manner".

We deem Trichet's decision to leave out "vigilance" as tactical, due to already strengthening euro. Using the term "vigilance" would have been received as a guarantee of a May rate hike, thus risking further elevating the euro from its current 2-year highs. Today's change of rhetorical tack does not preclude a Q2 rate hike, it only means the ECB is being  cautious with the rising value of its currency.

The US jobless claims rose to 342K from 323K, overshooting expectations of 320K. This pushed up 4-week average by 7K to 323K. Department of Labor attributes the jump to factors related to spring break, which should clear next week.

The dollar??™s shaky foundation goes from bad to worse as the currency hits new 2-year lows against the euro (1.3476), new 17 year lows against the Aussie (.8271) and new 4 ?? month lows against the Canadian dollar (1.1372).  Rising prices of oil, gold and other metals as well as rate hike expectations are fuelling the Aussie, while the combination of robust domestic growth and rising interest rates is fuelling the single currency. The yen remains the consistent loser, offering some relief to the dollar due to falling risk averseness and prolonged BoJ cautiousness vis-a-vis the risk or renewed deflation. While the current return to carry trades pales in comparison to that of the past 9 months, we??™re not seeing the return to the yen carry trades has been especially driven the Bank of Japan??™s ongoing discomfort with deflation.

Despite yesterday??™s confirmation from the FOMC minutes that inflation remains the principal risk to the Fed??™s economic assessment, the dollar remains overshadowed by the risk of further slowing at home and robust abroad.

Trichet leaves out "vigilance" but still means it

USDJPY struggles to break 119.50

AUDCAD play still in effect

Cable downside seen re-emerging

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