DAILY MARKET ANALYSIS
Monday, April 02, 2007

Key economic releases over the next 24 hours

Time (GMT)	Data release/event	Previous	Consensus
14.00	US ISM index (manufacturing)	52.3	51.4

Key factors to watch

The US ISM data will be important for interest rate expectations with the dollar vulnerable on a weak figure.

Markets will continue to monitor tensions with Iran closely. 

Trade issues will be a significant background focus during the day.

Global stock market trends and economic risk aversion levels will be watched closely

09.50 AM GMT Overall strategy:  Confidence in the US economy and currency will remain fragile in the short term with further unease over the housing sector. There will be increased fears over the US economy if there is a weak ISM figure and the longer-term dollar risks have increased. Nevertheless, the Euro looks to offer little immediate value given the amount of favourable Euro-zone developments priced in.      

Hedging/longer-term recommendations for the next 4 weeks

Currency	Spot	Recommendations	Recommendations
EUR/US$	1.3350	Reduce long dollar exposures/buy Euro at 1.3000	Reduce long Euro exposures/buy dollar at 1.3400

Bold figures indicate changed levels

Market analysis

Euro/dollar: 

The US growth prospects will remain an important focus and a firm national ISM index today after the strong Chicago figure on Friday would alleviate concerns to some extent. Overall confidence is likely to remain fragile, however, particularly with fears that housing weakness will have a negative impact on consumer spending and the wider economy. Structural US fears will remain significant and a rise in trade tensions would tend to be negative for the US currency on fears over reduced buying support for US Treasuries. The Euro will continue to be supported by expectations of further ECB interest rate increases. The market expectations and existing positioning strongly in favour of the currency will still make it difficult for the Euro to extend gains. Overall, the dollar is likely to find further support close to 1.34 against the Euro even though longer-term dollar risks  have increased. There is likely to be further tough short-term dollar resistance close to 1.3290. 

The dollar strengthened to 1.3290 against the Euro on Friday, but was unable to sustain the gains and weakened back to 1.3345 later in US trading. Dollar losses accelerated towards the end of European trading with a drop to lows near 1.34. The dollar steadied in early Europe on Monday at close to 1.3350, although sentiment was still weak.

Position adjustment was important during Friday and the Euro secured firm buying support at the end of the first quarter, especially as Euro-zone data has remained strong. The institutional weightings at the beginning of the second quarter will be important for near-term dollar direction with the US currency vulnerable if dollar holdings are cut further.

The Chicago PMI index strengthened sharply to 61.7 in March from 47.9 the previous month as the orders component rose strongly, although the employment data was subdued which will limit the positive impact. The national ISM data will be watched very closely on Monday for further evidence on the US manufacturing sector. The dollar will need a series of more reassuring data to ease expectations of lower interest rates and reverse negative sentiment towards the US currency.

The core PCE inflation data in the personal spending data recorded a 0.3% monthly increase with an annual rate of 2.4%, which is still above the unofficial Fed ceiling of 2.0%. The Fed will remain very reluctant to sanction a cut in interest rates while core inflation is running at these levels.

The Euro-zone data recorded a slight drop in the PMI manufacturing index to 55.4 in march from 55.6 the previous month.  The latest IMM positioning data recorded a renewed increase in long Euro positions to over 90,000 contracts which will expose the Euro to the risk of profit taking.