Traders Long Dollars Going Into Payrolls,Euro Rallies As Trichet Ignores Calls For Rate Cuts,Mixed Housing...

... Market Data Does Little For Pound

US Dollar
After this past week's extensive rally in the dollar, it is not surprising to see
some profit taking ahead of tomorrow's non-farm payrolls report. Right now the
consensus estimate is for 175,000 jobs to be added to the economy, compared to
274,000 jobs added the previous month. Yet, the actual range of estimates run the
gamut of 115k to 240k. April was a great month for job growth, but such impressive
gains will be hard to replicate this time around since we wont have the benefit of a
number of factors that may have overstated the April release such as the Easter
holiday shift, the five week survey period and distortions due to the Labor Bureau's
birth-death model. According to the FXCM Speculative Sentiment Index released this
morning, speculators in the market are extremely long dollars and short euros.
Therefore, since bulls already have their long dollar positions on, a blockbuster
200k plus number should have a more limited reaction in the EURUSD than a sub-150k
number. Based upon the most recent data that we have received today and over the
past few weeks, 175k will be a tough hurdle to overcome. The latest Challenger
report of planned job cuts in May jumped 42% compared to the previous month with
layoffs in the technology sector increasing eight fold. Jobless claims also climbed
to the highest levels in 9 weeks, bringing the four-week average of claims in May to
334k, compared to April's five-week average of 325k. The last 2 times that average
claims were approximately 334k, was back in March (336k) and January (330k), when we
saw 146k and 124k non-farm payroll gains respectively. This suggests that May's
jobless claims data should coincide with a weaker number in payroll growth. As it
appears, the risk is tilted more towards a downside surprise in payrolls and given
the mix of current speculative positioning, bears could also be sitting tight and
waiting for the results of NFPs to take profits on their shorts, which would result
in a nice contra-trend move.

Euro
After all of the fan-fare surrounding the European Constitution and the end to the
two most important votes that we have been focusing on for the past two weeks, the
market has finally settled and shifted its attention away from politics and back to
economics. Today, the European Central Bank ignored calls for a rate cut and
instead chose to celebrate its one year anniversary of leaving rates unchanged by
standing pat on interest rates once again. The central bank also cut growth
projections to 1.4% for this year and 2.0% for next. Despite calls for rate cuts,
Trichet said such move was "not an option" and that if the ECB was considering an
interest rate cut, they would send some sort of message to the market that led
people to believe that they are in fact preparing for a rate cut. Some press
articles have interpreted his "not an option" as a hint of a possibility of an ECB
rate cut since he used different wording this time around. However, in our opinion,
playing with words is something the Fed is famous for, not the ECB. The latter
likes to prepare a market for the imminent rather than shock it with surprises.

Pound
Fluctuating wildly in the overnight hours, the British pound remained in the
established range from the previous session as hopes for a reversal in the cable's
negative fortunes were dashed on further suggestions of not only a bottom in the
housing market but a potential collapse of the sector. According to the Nationwide
housing price report for May, residential valuations climbed a paltry 0.3 percent
compared with a 0.9 percent rise in the previous period. On an annualized basis
prices actually contracted, falling to 5.5 percent from 7 percent in April,
significantly low in comparison to a 20 percent annualized expansion in the previous
summer. Additionally, construction activity also showed signs of sluggishness.
Released at a 52.6 reading, the May report has broken the three-month average of
54.6. Although still indicative of expansion, the lower print has sparked some
speculation of an imminent slowdown and may further monetary officials in remaining
pat on the current benchmark rate when they meet next week. However, the only
exception, as mentioned in the minutes of their last gathering would be the adverse
effects of the current consumer credit balance.

Japanese Yen
Declining from an intra-session high of 108.86 hit late in the New York session, the
Japanese yen gained some strength as market participants unwound long dollar
positions in the overnight. Attributed to the shortfall looks to be a lone tepid
economic data release as well as a key technical resistance level, with most
speculating the influence of the latter as being greater. The monetary base report
for the month of May showed a 2.2 percent increase in the supply of money as many
economists expected a 2.5 percent rise. Although approximately in line with the
consensus, the recent reporting shows that deflationary conditions continue to
persist in the world's second largest economy, further quelling any rate
speculation. Last month's supply pool rose 3 percent, indicating a slight
contraction. As a result of the lackluster evidence and with no further releases
scheduled for the week, attention will be placed on next week's flurry of data.
Most importantly, yen bulls will desire confirmation of the previously positive eco
figures through CAPEX and consumer spending reports.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
www.dailyfx.com


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