Euro Rate Awaits Payrolls Release - 4.3.2011

The absence of news flow and economic data releases made for a quiet Asia session. The dollar stabilized against the euro after yesterday's heavy losses in the wake of ECB President Trichet's hawkish commentary. EURUSD traded 1.3930-1.3972, USDJPY 81.73-82.52. The S&P 500 finished +1.7% higher, and the Nikkei is +1% stronger at the time of writing. The nonmanufacturing ISM index rose to 59.7. Jobless claims fell sharply to 368k and the downtrend continues after having been interrupted by January storms. Economists forecast a +200k rise in total nonfarm payrolls. It is also expected that the unemployment rate will stay unchanged at 9.0% . Before the payrolls report, attention will likely be on today's speeches from several ECB policymakers, where corroboration of Trichet's remarks could lead to further euro upside. We still think the dollar could strengthen in the medium term but the latest ECB comments put the dollar on rockier footing in the near term.

EUR

Market participants had been expecting a hawkish tone and ECB President Trichet definitely delivered, noting the need for "strong vigilance" as risks to the inflation outlook had moved to the upside. The phrase has been used previously to signal an imminent rate hike and Trichet later said that vigilance could mean a rate hike next month, though he stressed this is not certain. The ECB also increased its staff forecasts for inflation in both 2011 and 2012, with the upward revision for 2011 to between 2.0% and 2.6% from 1.2% to 2.2% previously. Economists now look for a 25bp hike at the April meeting. The ECB kept the rules of the 3m repo operation unchanged at full allocation, a fact which was largely overshadowed by the discussion on rates. The hawkish comments point to continued euro upside, at least in the near term. But EURUSD failed to go above 1.40 as market participants await the US labour data release. An above-consensus print in the US will likely be needed to help the dollar recover some of its losses versus the euro. A Spanish auction was well received with a bid-to-cover ratio in the 5y at 2.17, up from 2.11 last time.