Talking Points
AUD jobs skyrocket to 56K
JPY Eco Watchers declines sharply
UK IP and MP contracts
CB rate announcements on deck overshadowed by al-Zarqawi death?
Its Central Bank day in the FX market with both the BoE and the ECB set to make rate announcements, but that news may be overshadowed by the report overnight that the leader of Iraqi insurgency and one of the top men in the al-Queda hierarchy - Abu Musab al-Zarqawi - has been killed in a joint US and Iraqi military raid north of Baghdad. The news immediately sent the oil futures below the $70 dollar handle as traders celebrated the possibility of an increase in the flow of crude from Iraq which has been severely compromised by insurgent sabotage. Whether Mr. al-Zarqawis death marks a turning point in the Iraq conflict remains to be seen, but it certainly buoys the near term prospects for the dollar for several reasons. It curtails, if only for a short time, the geo-political tensions that have roiled the region and it will likely eliminate some of the terror risk embedded into the oil market leading to lower crude prices. Lower energy costs, of course, would be beneficial to the US economy in a variety of ways. First by compressing the US Trade deficit, a progressively large part of which has been due to higher import costs of crude and secondly by serving as a de facto tax cut for the US consumer and thus offsetting the depressive effects of higher interest rate hikes planned by the Fed.
With market expectations having seesawed in the past week, the consensus on the various central bank moves boils down to the following. BoE will stay pat at 4.5% and with todays very weak Industrial and Manufacturing Production results is unlikely to even think about tightening until well into the fall of 2006. The ECB will opt for a 25 basis point hike, but traders will be keen to hear if the European monetary officials intend to maintain vigilance by hiking rates on a near monthly basis for the rest of the year. Finally, consensus on the Fed has shifted markedly after the weak NFP last Friday and now the vast majority of market participants expect the Fed to raise rates to 5.25% at the June FOMC meeting. With tonights news of al-Zarqawi death those odds should only increase as lower oil prices will provide cover for Feds actions. In short, a market that only a few days ago appeared to be unabashedly euro bullish has suddenly found reason to get long dollars. But if lower oil prices do not provide a boost to the US economy, dollar strength will be fleeting at best.
