Daily Financial Market Outlook

Overview & economic commentary

The two central bank decisions turned out as expected yesterday, but in the case of the BoE, this may stil mean that at least one MPC member will have voted to lower rates. We will have to wait for the release of the MPC minutes in two weeks time to find out, but the Q2 Inflation Report next week should give a pretty good idea of where the Bank believes interest rates should be in the context of its projections for economic growth and inflation. In terms of the ECB, there was no indication that growth forecasts will be significantly revised down when the updated staff projections are published in June. This supports our view of no change in euro zone rates through 2008. A relatively quiet final day of the week in terms of economic data today brings US foreign trade data for March and the Canadian employment report for April. A rise in US exports to a new record $151.4bn in March was offset by a record as well for imports of $213.7bn, despite a lower oil deficit. A stabilisation of oil prices in March means the trade deficit may have narrowed from $62.3bn. The figures are relevant because they may help decide whether or not we get an upward revision to the advance Q1 gdp estimate of 0.6%. Two weeks ago the Bank of Canada hinted that more rates cuts could lie ahead, and it will be in this context that we will judge the Canadian employment data this afternoon.

Currency commentary

The dollar recovery was interrupted yesterday by the interest rate verdicts of the BoE and ECB. The move in €/$ back above 1.5400 and in $/Y below 1.0400 triggered wider profit taking in dollar crosses. Equity markets were unable to thwart the move despite the positive close for US stocks. US trade data will wrap up the trading week this afternoon but thin trading conditions and a traditionally choppy pre-weekend squeeze could impact major fx pairs. A smaller trade deficit is forecast for March and this could bring some support for the dollar if markets conclude that Q1 gdp could be revised up. However, pressure on equities from disappointing Q1 AIG earnings could favour yen and chf buying. $/C$ has settled in a narrow range since the Canadian interest rates were cut to 3.0% on April 22, but perhaps technicals levels of 0.9980 and 1.0240 could be tested if the jobs data shows a surprise and influence expectations of the next move in rates. £/C$ rebounded yesterday off a 2-month low to 1.9846.

Major data and events today

• French industrial production (07:45)
  Feb +0.3% Y-O-Y +2.0%
  Mar (f'cast) -0.3% Y-O-Y +1.6%
  Median -0.4% Range -0.6%:+0.2%
• French manufacturing output (07:45)
  Feb +0.3% Y-O-Y +1.9%
  Mar (f'cast) -0.5% Y-O-Y +1.9%
  Median -0.5% Range -0.7%:zero
• US Trade balance (sa) (13:30)
  Feb -$62.3bn
  Mar (f'cast) -$62.0bn
  Median -$61.4bn Range-$65.0bn:-$58.0bn
• Japan Leading index (prel) (06:00)
  Feb 54.5%
  Mar (f'cast) 20.0%
  Median 20.0% Range 20%:40%
• Japan Coincident index (prel) (06:00)
  Feb 70.0%
  Mar (f'cast) 33.3%
  Median 33.3% Range 33.3%:44.4%
• Canada unemployment rate (12:00)
  Mar 6.0%
  Apr (f'cast) 6.0%
  Median 6.0% Range 6.0%:6.1%
• Canada employment change (12:00)
  Mar +14.6K
  Apr (f'cast) +10.0K
  Median +10.0K Range -5K:+30K
• Canada trade balance (sa) (13:30)
  Feb +C$4.9bn
  Mar (f'cast) +C$4.5bn
  Median +C$4.5bn Range +C$3.5bn:+C$5.4bn

Chart of the day: Stable oil prices in March suggest US trade deficit may have narrowed from February.

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