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Tuesday June 21, 2005 - 10:51:31 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD, still stinging from ECB speculation, is hit further by scale of Riksbank repo cut. Above 1.2150- 80 is required to suggest stabilisation.

• Riksbank frontloads rate cut – but low rates will be constant thorn in SEK side.

• Canadian retail sales also due.

Market Outlook

EUR-USD was knocked back further this morning by the Riksbank repo cut. The 50bp cut (see below for SEK implications) comes at a bad time for the EUR when an ECB rate cut itself is being hotly debated. It is not a great advertisement for the state of the European economy in general. A Reuters report yesterday cited European monetary sources as suggesting that a rate cut was a possibility in the months ahead if there was no turnaround in the weak economic data. The story adds weight to the stories about disagreements on the ECB council about how to respond to the recent downturn in the data. One camp believes that a rate cut will do no good, while others feel that at the margin it will provide a fillip to confidence. Both arguments have validity although those against a cut will be in a less defensible position if the data continues to deteriorate. It is not just the threat of a rate cut that is causing trouble for the EUR. Coming on the heels of the catastrophes relating to the EU Constitution and EU Budget, it is another example of disagreement at the highest level about how to resolve an issue in the Eurozone. One size is clearly not fitting all at the present time with regard to all aspects of European integration.

French consumption data was weak this morning while the improvements in the ZEW survey were not that impressive. With the ECB policy debate coming to the fore, the Eurozone economic data will be important for the EUR in the short-term, although the Euro economic schedule is now event–free for the rest of this week.

The dip back below 1.2150-80 yesterday was a negative development for EUR-USD and until it rises clear of this area again there will be immediate downside risk back to the recent low at 1.2017 and beyond to important support at 1.1950-85. However, after the scale of the moves seen over the past six weeks, a short-term rebound of some sort in EUR-USD should not be ruled out. Above 1.2150-80 would increase the possibility of a short-term correction towards 1.2290 or 1.2350.

The Riksbank opted for the more dramatic 50bp cut in the repo rate to 1.5%, citing a substantial downward revision to their GDP growth forecast (2005 now at +1.9% from +3.2%) as well as the expectation that underlying inflation will remain well below the 2% target. The negative implications for the SEK have been softened a little by the comment from the Riksbank that monetary policy is now 'well balanced' and that future policy will depend upon the emergence of new information. This wouldappear to suggest that rates will stay on hold until the nextInflation Report on October 20 (there is only one otherscheduled meeting between now and then on August 23). Inother words, the magnitude of today's action has diminished the threat of negative policy announcements in the short-term.
However, the low level of interest rates will likely be a thorn in
the side of the SEK going forward.

Key today will be whether EUR-SEK can stay above the 9.25 level early in the US session (9.25 is pivotal to short-term direction). However, another test (and possible break) of 9.31- 9.33 key resistance seems likely at some point. Also keep an eye on NOK-SEK, which could have implications for general SEK performance. Above the recent high at 1.1850 would be negative for the SEK.

Day Ahead
Canada – retail sales data is due after having shown much strength in recent months. Rate expectations were boosted recently by strong labour market and export data (the latter being the major focal point for the BoC at the present time). If export recovery continues in coming months and strength in domestic demand (e.g. retail sales) is sustained, rate hikes could come back on to the agenda. It is important therefore that the domestic data remains resilient.

Data/event EDT Consensus*

US Chain store sls (w/e Jun 18) w/w 07.45 +0.6% last
CA Retail sales (Apr) m/m 08.30 +0.5%
CA Retail sales ex-autos (Apr) m/m 08.30 +0.6%
US Redbook sls (w/e Jun 18) m/m 08.55 -0.3% last
EU ECB’s Weber opening remarks at 11.00, Trichet spks at 11.15
US ABC consumer conf (w/e Jun 12) 17.00 -12 last
JP Trade balance (May, sa) 19.50 ¥0.8trn

Latest data Actual Consensus*
FR H’hold consumption (May) m/m -0.9% -0.4%
SE Riksbank repo -50bp -25bp/50bp
EU ZEW expectations (Jun) 16.7 17.0
DE ZEW expectations (Jun) 19.5 18.0
EU Labour costs (Q1) y/y +3.1% +2.2%
* 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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