FOREX

For 6/1/2007
Tomorrow’s US Employment report could be the catalyst to spark the USD out of this trading range. As most economists are forecasting approximately a gain of 138 thousand jobs, a number greater than 138k would be viewed as USD positive. Coupled with the new yearly high in the 10 year yield (4.91%) and subsiding speculation of any interest rate cuts in the near future by the Fed, the USD could catapult out of this narrow band.

The RESULT: EUR/USD and GBP/USD actually rose despite the prediction above. The non-farm payroll measures the number of jobs created in the last month and this number came in strong at 157,000 versus the expected 135,000. Looking underneath this raw number into the multiple dimensions of the report, it suggests so-so growth will continue. Just a slow, steady grind upward. This report is important because it influences policy decisions made over the next several weeks; therefore, it removed any lingering possibility of a rate cut in the foreseeable future.

On the other hand, the core PCE deflator came in low at .1 percent versus .2 percent. The deflator measures consumer inflation, excluding energy and food. This is important because energy has seen a huge run-up, which greatly impacts inflation. The dollar dipped on this data but without the energy component, it's not a full story.

The ISM index simply measures manufacturing strength and came in strong at 55 versus the expected 54. Some of this strength was anticipated after yesterday's strong showing in the Purchasing Managers' Index (PMI), which is very similar in nature.

Higher oil prices are typically dollar negative, since petro dollars typically flow out of the greenback. Thus, higher oil prices = long GBP/JPY, GBP/USD

Higher oil prices are good for the GBP/JPY pair since Japan has to import their oil and the UK has strong oil interests.