FOREX EUROPE UPDATE - USD

The USD has stayed range bound this morning in Asia, trading in a 1.3278-1.3290 range against the EUR and a 115.13-115.35 range against the JPY. The markets have stayed quiet ahead of today's payrolls number.

Yesterday ECB President Trichet was coy about when the ECB would next hike rates after the central bank raised interest rates 25bps as expected to 3.50%. But market reaction was minimal.

In addition yesterday's US data showed jobless claims fell 34k to 324k, moderating from the surge in the week of Thanksgiving. But the underlying trend continues to be higher in weekly claims as the labour market reacts to the slowdown in the housing market.

Thus today's payrolls release will be critical to see whether the market wants to continue selling the USD in the near term. Our 90K forecast for the rise in payrolls in November would not be significantly different from the 92K increase in October, but it would expose a clear weakening trend - down from 134K per month on average over the last seven months and a previous trend of 170-180K.

Our US economics team also expects a 0.2% point rise in the unemployment rate. This would reverse the drop to 4.4% in October. We therefore continue to expect a 100bps cut in the Fed rates in 2007 starting from March 2007.