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Morning Adviser Asia 9/2/2010 11:41:00 PM

Trichet Wary On Inflation

By Amelia Bourdeau

US data generally exceeded expectations Thursday, with initial jobless claims ticking down from 478k to 472k and July pending home sales rising 5.2% m/ m. But the main event of the NY trading session was ECB President Trichet's press conference following the bank's policy decision. The euro weakened initially on the announcement of the extension of liquidity measures, but it then recovered as Trichet said the risk to inflation was tilted to the upside. Trading was then subdued as investors remained cautious ahead of payrolls data.

The US August payroll report is Friday's main event. The focus will once again be on the private payroll figures, as layoffs of temporary Census workers will weigh on total payrolls. Our US economists are a bit more optimistic than the consensus forecast. Our US team expects a headline reading of -70k for August nonfarm payrolls and a reading of +75k for private payrolls. The consensus expects -100k for headline nonfarm payrolls and +43k for the change in private payrolls. If the private payroll component exhibits another muted gain, then that result is unlikely to provide the market with much direction and G10 currencies will remain stuck in current ranges. Ahead Friday, the Non-manufacturing ISM is also released. EURUSD traded 1.2781-1.2844 and USDJPY 84.03-84.45.

EUR

Targets: EURUSD 1m 1.2800, 3m 1.1500

In his press conference, as expected, Trichet announced that the ECB would continue to conduct its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until 18 January 2011. The fixed rate tender procedure with full allotment will also remain in use for the special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed and at least until the end of 2010. Furthermore, the Governing Council has decided to conduct the 3-month longer-term refinancing operations (LTROs) to be settled on 28 October, 25 November and 23 December 2010 as fixed rate tender procedures with full allotment. The rates in these 3-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.

The ECB revised its 2010 GDP forecast from 0.7%-1.3% to 1.4%-1.8%. ECB forecasts revised 2011 GDP forecast from 0.2%-2.2% 0.5%-2.3%. Upward revision for 2010 was unavoidable given strong base effects after Q2 strong data point. The 2011 revision is more interesting, as it shows that the ECB is becoming more constructive on the medium term outlook. While Trichet's comments were a bit more constructive on growth, overall he was neutral, taking care not to signal a significant change in tone.

Press headlines reported that the EU plans to limit naked short sales of stocks, and government debt, however, no further details were released.

Data overnight was broadly firm. Q2 GDP was confirmed at 1.0%q/q, and the annualized figure revised higher to 1.9%. Eurozone PPI was slightly weaker, while gross fixed capital formation and government expenditure all increased on the quarter.

CHF

Targets: USDCHF 1m 1.0200, 3m 1.1300 / EURCHF 1m 1.3000, 3m 1.3000

Q2 GDP was stronger than expected at 0.9%q/q (cons. 0.8q/q), 3.4%y/y, supporting expectations that the SNB could move to a more hawkish track. While CPI has tracked down recently, deflationary risks are not as prevalent as they were previously and continued growth should keep further SNB intervention at bay.

Retail sales were also stronger than expected, coming in at 4.8% .

We remain short GBPCHF, entered at 1.5580 with a target at 1.5000.

SEK

Targets: EURSEK 1m 9.5000, 3m 9.5000

The Riksbank hiked by 25bp to 0.75% as expected, though the repo rate forecast was kept unchanged. The Riksbank's tone was generally robust, noting that the repo rate would need to gradually normalise due to strong economic conditions. The GDP forecast for 2010 was boosted to 4.1% but those for 2011 and 2012 nudged lower.

GBP

Targets: GBPUSD 1m 1.5000, 3m 1.3500

UK data remains soft and housing figures surprised sharply to the downside, with Nationwide Prices dropping by 0.9% on a monthly basis. Construction PMI was also softer at 52.1 (cons. 53.2).

AUD

Targets: AUDUSD 1m 0.9000, 3m 0.8500

The Australian trade balance was weaker than expected at A$1.88bln, our economists note that the figure is still healthy after June's record figure. However, they warn that given the rise in AUD commodity prices and stronger AUD point to falling net volumes and exports may subtract to Q3 GDP.

FX Technicals

EURGBP recovery eyes 0.8363

EURUSD BEARISH Sell-off from 1.3334 found support at 1.2588 ahead of 1.2434 Fibonacci support. Short-term resistance is defined at 1.2933 USDJPY BEARISH Focus is maintained on 83.60 trend low, move below the level would expose 79.75 key support. Short-term resistance is defined at 85.91 GBPUSD BEARISH Sustained break of 1.5324 would favor a bearish move towards 1.5125. Near-term resistance lies at 1.5475 ahead of 1.5713 USDCHF BEARISH Break of 1.0131 favors the extension of bearish trend towards 0.9918 ahead of 0.9786. On the upside resistance holds at 1.0265 ahead of 1.0466 AUDUSD NEUTRAL Need a break above 0.9222 to confirm a bull trend. 0.8856 marks the key support level . USDCAD BULLISH Bullish pressure holds below 1.0680; break of the level would open 1.0853. Initial support is defined at 1.0473 ahead of 1.0248 EURCHF BEARISH Focus is on 1.2852, recently defined trend low. A break here would leave little support till 1.2403. Near-term resistance comes in at 1.3146 EURGBP NEUTRAL Recovery eyes 0.8363, only a break above 0.8532 would confirm an upward trend. Support holds at 0.8068 EURJPY BEARISH Push below 105.44 would expose 100.00 next. Near-term resistance is defined at 111.11 ahead of 114.74 *NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation of price action.