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May 26, 2006

Awaiting Core PCE, Japn CPI Not Enough, Snow to Quit
by Ashraf Laidi

6:15 am ECB Pres Trichet Speaks. 8:30 am US Apr Core PCE Price Index y/y (exp 2.1%, prev 2.0%) 8:30 am US Apr Personal Spending (exp 0.6%, prev 0.6%) US Apr Personal Income (exp 0.7%, prev 0.5%) 9:45 am May Univ of Michigan Consumer Sentiment - final (exp 79.5, prev 79.0)

Markets await the crucial core PCE price index from the US expected to register a 2.1%y/y reading, which should cement the prospects for a 25-bp Fed rate hike in June, thus adding some conviction to the dollar's intermittent rounds of strengths. Thin pre-holiday trade and receding expectations of a Bank of Japan rate hike this summer, should also help bolster USDJPY support above 111.70-75. Comments from Japanese Finmin Tanigaki that deflation is not yet overcome -- following the 0.5% rise in the annual core CPI -- further cooled speculation of a sooner than a later rate hike.

Yen stabilizes after CPI, MoF comments

Market chatter is now indicating that the Bank of Japan may make its first rate hike as late as October, following Friday's CPI release, which was deemed by govt officials an indication of improvement but not the end to deflation. It seems the function of these officials will aim at preventing the yen from strengthening towards the 110 figure, which is regarded as strenuous for Japanese exporters.

April CPI rose 0.5% y/y, rising for the sixth straight month, matching consensus forecasts, rather than surprising on the upside as was rumored in the Thursday NY session. The headline CPI rose 0.4%, making 4th consecutive monthly gain.

Washington Post says Snow to leave by July 3

Speculation of US Treasury Sec John Snow resignation has solidified after the Washington Post cited in its Friday edition that Snow told the White House he plans to remain in his position no later than July 3 while a replacement is sought.

The Washington Post said Republican insiders indicated the following possible candidates to succeed Snow: former commerce secretary Donald L. Evans, Commerce Secretary Carlos M. Gutierrez, Ambassador David C. Mulford and Stephen Friedman. We regard Messieurs Friedman and Evans to have equal chances. Mr. Friedman's odds are high for the mere reasons that he not only has proven to sound off along the White House tune on economic policy during in his brief stint (less than 2 years) as the president's former chief economic adviser, but also may be thought as commanding the markets' respect due to his former role as Goldman Sachs chief executive. Being a former Secrtry of Commerce, Mr Evans sees his chances for the job just as elevated as Mr Friedman's.

Since the White House seems to be placing more priorities on international finance considerations (pressing on China FX reval before the midterm elections, working with G7 on imbalances) rather than on domestic policies (failed pension privatization, passed tax cuts), a Secrty with an international pedigree would be essential.

While former US Treasuries with a Wall Street background served during periods of dollar strength (Bill Simon of Salomon Bros in 74-77, Donald Regan of Merrill Lynch 81-85 and Robert Rubin of Goldman Sachs 95-99), Mr Friedman may prove to the exception due to his time at the White House and a possible support for the increasingly signaled weak dollar policy.

EURUSD tests downside of pennant, but stabilizes on Papademos

ECB VP Papademos contributed with some hawkish remarks on Thursday saying inflation pressures may be more lasting than expected as a result of faster-than-expected global growth. He said the increasingly globalized economy may help explain the relatively subdued pace of inflation but a falling global output gap "may also help explain why inflationary pressures may be increasing in the coming quarters as the global economy continues to expand at a robust pace, greater than the estimated range of rates of global potential growth";. Papademos said, according to the prepared text of his speech. The comments fortify chances of a 25-bp rate hike on June 7th.

Traders will show passing interest to German state CPI releases and the national preliminary CPI/HICP figures as well as a speech by ECB's Trichet and Gugerellin at 6:15 am and 6:30 am NYT respectively.

Although the pennant in the chart below suggests we could see a renewed rise in the medium term (to 1.30 before end of June), we could see further pullback towards the preliminary support of $1.2720 and more solid foundation at $1.2670). Should today's core PCE price index from the US shows at least 2.1%, then the pair could be extend to 1.2720. Key foundation stands at 1.2670. Gains seen facing the topside of the pennant wedge at 1.2830. A break seen cooling at 1.2855-60.

Ashraf Laidi
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