Trichet Fakeout Weighs on the Euro

As a result, the pair tumbled more than 100 points and remained heavy in tonight's lackluster trade ahead of the NFP's. So why did Mr. Trichet, as analysts at detachedtrader.com so inelegantly put it, decide to "throw the euro longs under the bus?" Most analysts surmised that European monetary authorities were highly fearful of stifling Eurozone's nascent economic recovery, driven primarily by the region's critical export sector.

Having learned their lesson well from the 2004 spike in the EUR/USD to 1.3600 which consequently pushed the Eurozone into a near recession as growth came to a virtual standstill and German unemployment skyrocketed above 12%, ECB officials decided to be far more gradual in their approach this time.

Clearly, the European Central Bank deviated from their traditional mandate of assuring price stability and opted instead to contain the rise in the exchange rate. One key factor in their decision making process may have been the fact that the EUR/JPY cross had reached near vertical proportions, trading at an all time high of 144.50.

With Euro-Asian trade flows possibly endangered by unbridled enthusiasm for the cross from currency speculators, the bank may have decided to engage in a bit of preventative policy making by in effect "talking the euro down".

Attention now turns to the NFP's with most market participants generally uncertain about the results. Consensus calls are for 190K new jobs but several analysts have handicapped a lower than expected number of 150K while others forecast much stronger reading of 240K +.

The guesswork is made even more confusing by contradictory economic data, with this month's ISM employment component slipping while weekly jobless claims, Challenger layoff figures and Monster worldwide index all pointing to much healthier numbers.

Finally, no one is quite certain what to make of Secretary Snow's statement that NFP's will show "good numbers." It is highly unusual for a US public official to comment prior to the release of governmental data and some analysts have speculated that Mr. Snow may have been reacting to complaints about his inability "communicate" the administration's economic policy, as rumors of his departure swirled in the FX market all week.

Despite the confusion, one key idea is clear. The NFP must print near or better than the 200K level in order to support continued rate hikes from the Fed. Any significant downside surprise would put enormous pressure on monetary officials to cease and desist as the US mid term election cycle now begins to take hold.