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Thursday June 9, 2005 - 10:57:11 GMT
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Forex: Mellon FX Daily - U.S. Edition

Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD steadier in Europe, but still fragile.

• Residual support for AUD from the employment report and for NZD from the RBNZ.

• UK manufacturing output up in April, but trend still

• Features today include Swedish ind prod, UK MPC outcome and Greenspan’s testimony on the Economic Outlook.

Market Outlook

The inability of EUR-USD to mount a serious recovery over recent days finally weighed on sentiment yesterday, moving sharply lower in the hours after the European close. There were no obvious news factors behind the move, although a decent US bond auction, a disappointing policy offering from Villepin and confirmation from the ECB’s Weber that they are now in ‘wait and see’ mode, probably didn’t help matters. There was a story about Weber approving the recent EUR drop, but we could not find an actual quote from him on that issue. The break below the trendline on the hourly chart (that had supported the recovery in recent days) was the major technical development and this prompted the sharp sell-off. The line came in at 1.2277 when it finally broke. There is now a risk of further losses in the short-term, although a break below 1.2160 (the low from last week) is needed to trigger this. Above 1.2250 is required to offer some stability ahead of Greenspan and we may need to see a very poor US trade number tomorrow to offer any near term hope for EUR-USD.

The AUD has managed to hold in reasonably well, aided by a solid looking employment report overnight. 0.7640 remains the key short-term support level and this may be put to the test if EUR-USD were to run away further on the downside. Trendline resistance now comes in at 0.7725. The RBNZ left rates unchanged but signalled a continuing tightening bias. They said that activity remained “strong across many parts of the economy” and that “inflation pressures remain persistent”. The only dovish comment was “there is sufficient evidence that the economy is slowing, and that past policy tightenings are yet to have their full effect, for us to leave policy on hold at this point.” However, they concluded that upside risk remained on inflation and that if there were upside surprises to this outlook a “further tightening in monetary policy would likely be required”. The comments offered some support to the NZD, although 0.7175 needs to be cleared to keep this going. The market may also remain more sceptical than the RBNZ about the prospects of strong growth continuing across a majority of sectors. The tone of next week’s NZ retail sales number will be important. Below 0.7100 would open downside risk.

The ECB monthly report confirmed the latest forecast changes – already announced by Trichet last week. The mid-points of ECB staff GDP forecasts lie at +1.4% for 2005 and 2% for 2006 compared to +1.6% and 2.1% previously. The ECB said that recent data had been weak and that there were downside risks to these projections. However, they also said that while inflation was likely to remain well contained, there were upside risks to the CPI forecasts. They also noted the strong showings in most measures liquidity. Overall, there were no fresh hints about monetary easing. The ECB is taking the view that further rate cuts are unlikely to stimulate economic growth, quite simply because those indicators most sensitive to short-term rates are already fairly buoyant. Weak growth, they would argue, must be related to non-monetary issues and it is easy to have sympathy with this view.

Data released this morning showed the German trade surplus narrowing sharply, although this was due to import strength (+3.8% m/m) rather than a large fall in exports (-0.4% m/m). UK manufacturing output bounced back in April, suggesting that the March number had been partly depressed by the early timing of Easter this year. However, the 0.9% rise in manufacturing output for April follows a 1.6% decline for March, so taking the two together still suggests a weakening trend overall. Indeed, the 3m/3m growth rate of -1.4% is the weakest since August 2002. The trade data was fairly unremarkable, although exports are perhaps showing more resilience than one would expect given talk of weakening growth overseas, especially in Europe. Still, it can take a few months before weakening orders translate into lower actual shipments.

Day Ahead
UK – the MPC is likely to leave rates unchanged, even though a rate cut could probably be justified given the recent run of data. However, it is only a month since the Inflation Report and the MPC typically doesn’t like changing rates when the market is not expecting a move. August is the next candidate month for speculation about a rate cut and much will depend upon how the data develops between now and then. NIESR’s latest estimate of GDP is also out today.

Sweden – industrial output comes today after a poor set of Q1 GDP numbers yesterday and more weakness would add to speculation about a Riksbank rate cut in the next few months. A 25bp cut by September is already discounted, with the Sept 3mth FRA trading at 1.75%/1.78% this morning. EUR-SEK has made a good job of going up recently despite the problems facing the EUR, although 9.21 needs to give way to allow this to extend further in the short-term. Upside risks remain in place while the data is weakening, but a pullback looks more likely initially.

Canada – Q1 capacity utilisation (currently highest since 1988) and productivity are due today. The strength in the former and weakness in the latter over the past few years has alerted many commentators to the lack of investment in Canada. However, such longer-term issues have not been an issue for the currency market and market impact will probably be limited today.

US – Greenspan’s comments earlier this week led to some speculation that he was adding weight to the argument about slowing growth prospects. He was of course merely examining the reasons why bond yields were currently so low and didn’t seem satisfied with any of the possible explanations he put forward. However, the fact remains that a number of indicators have suggested a softening in demand in both the US and other parts of the world, so an acknowledgement of the downside risks to growth would not be unexpected today. He is also likely to be more relaxed about the inflation backdrop following the recent softness in the main inflation numbers. This may partly aid speculation about the FOMC getting close to a pause in the tightening cycle (3.5% in August is our own forecast peak), but overall he is likely to retain the core belief of a steady noninflationary growth outlook. It will be difficult for Greenspan to offer a really clear outlook on policy, as the way Fed policy unfolds will ultimately depend upon the data itself and he is as much in the dark as everyone else on this score. However, any comments he offers on the status of the process of removing policy accommodation will be watched closely.

Data/event EDT Consensus*

GB MPC rate announcement 07.00 4.75%
SE Ind prod (Apr) m/m 07.00 -0.7%
US Initial claims (w/e Jun 4) 08.30 335k
US Continuing claims (w/e May 28) 08.30 2602k last
GB NIESR GDP (3mths to May) q/q 08.30 +0.4% last
ZA SARB rate announcement 08.30 7.0%
CA Productivity (Q1) q/q 08.30 +0.3%
CA Capacity utilisation (Q1) 08.30 86.1%
CA New house price index (Apr) m/m 08.30 +0.4%
US Greenspan testifies on Econ Outlook 10.00
JP Domestic CGPI (May) y/y 19.50 +1.8%

Latest data Actual Consensus*
JP Current account (Apr, sa) ¥1.6trn ¥1.5trn
AU Employment (May) +14k -5k
AU Unemployment rate (May) 5.1% 5.2%
JP Consumer confidence (May) 48.2 47.9
DE Trade balance (Apr) €12.6bn €14.8bn
DE Current account (Apr) €7.0bn €9.0bn
GB Ind prod (Apr) m/m +0.9% +0.2%
GB Manu output (Apr) m/m +0.9% +0.3%
GB Global trade balance (Apr) -£4.8bn -£4.7bn
GB Non-EU trade balance (Apr) -£2.6bn -£2.4bn
* Consensus unless stated

2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005


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