Euro Motionless ahead of NFP while Yen Gains

Talking Points
      ·          Japanese government raises forecasts for 2007 to 2.1% from 1.9%<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

·          Morgan Stanleys Miles asked to join BOE

·          Swiss employment  reaches lowest level in 3 ½ years

·          All eyes on Non-Farm payrolls

The currency market produced a typically listless night of trading ahead of NFPs accentuated by the fact that the G-3 economic calendar was practically barren.  The euro remained motionless ahead of the report as all those who wanted to take a position appeared to have done so. One of the key factors over the past 48 hours has been the effect of the ADP report on consensus estimates.  The market forecast has been marked up significantly since the start of the week with most participants now expecting a figure of 200K rather than 150K. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The ratcheting up of expectations of course could lead to greater disappointment should the number print lower. In general, the art of forecasting NFP s makes picking the lottery number appear to be a scientific enterprise by comparison, therefore we will not venture a guess. However,  we wonder if the EUR/USD  may experience the same initial knee-jerk reaction as yesterday when it verticalized by 60 points in the immediate aftermath of Mr. Trichets statement only to drift lower as he continued speaking.  Even of the NFPs  generate only 150K jobs, there is a strong chance that the Fed may hike rates another 25bp in August as rhetoric from Fed officials has been unabashedly hawkish. In fact futures are handicapping  the possibility of another rate hike at 70%.  Given our belief that the ECB will only hike once by 25bp in August,  the interest rate differential in the pair will remain at status quo, suggesting that the EUR/USD will  continue to be trapped in the 1.2500-1.2900 range for the foreseeable future. Only a drastically lower NFP number could shift Fed policy and put a halt to the rate hikes providing euro with room to stage a significant rally.

Meanwhile in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Asia, yen firmed trading below 115.00 for most of the night after Japanese government upgraded its forecast for growth in 2007 from 1.9% to 2.1%. Yet doubts continued to swirl regarding the timing of the end of ZIRP. The latest issue to preoccupy the policy makers is the impact of North Korean missile launch on the Japanese  economy.  Next week the market expect the BOJ to finally lift rates by 25bp at its policy meeting on July 13^th. If the North Korean missile launches should postpone the move by another month it will serve as yet another negative for the yen in world where the other G-3 members are relentlessly raising rates.

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