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Tuesday August 9, 2005 - 12:31:59 GMT
Mellon Bank Foreign Exchange - https://fx.mellon.com/

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY supported by brighter economic news.

• Working out likely Japanese voter sentiments will be a complex business. Opinion polls are awaited.

• EUR-USD reverses initial gains.

• FOMC statement may change today, but they will be keen to maintain the idea of further rate hikes.

• US productivity/unit labor costs also feature.

Market Outlook

The JPY has given up some of the corrective gains seen yesterday, although USD has been firmer in general after weakening initially in Europe. JPY supportive factors have been a strong machinery orders number and a slight economic assessment upgrade from the BoJ in its latest monthly report. Yesterday’s corrective JPY gains no doubt reflected the positioning that has been maintained in recent weeks against the JPY – a classic ‘sell on the rumour buy on the fact reaction’ to yesterday’s confirmation about a Japanese election. However, political uncertainty will not go away in Japan, so the JPY is likely to remain a little constrained. USD-JPY needs to get below 110.75 to suggest a powerful signal on the downside. With regard to how things pan out politically over the next few weeks, culminating in the election itself, there are many permutations. If the public are truly sympathetic towards reform, they could support Koizumi, although this would mean voting for the LDP and they may feel that he has had his chance and that they now need to look outside the LDP, which has ultimately proved to be too much of a constraint to Koizumi’s instincts. The DPJ opposition claim that they are an alternative to the LDP monolith, but the DPJ voted against postal reform, so can they truly claim to be reformist? This is why Koizumi is keen to throw out all of those LDP MPs who voted against the bill in the Lower House vote in July. Then Koizumi can claim that the party is ’cleaner’ and more able to push through reforms in the future. In this regard, a split in he LDP is not undesirable as far as Koizumi is concerned. Opinion polls are now awaited for signs about how public sentiment is developing.

EUR-USD continues to look as if it wants to push higher and a test of 1.2450-1.2500 still looks likely in the short-term as the mini-bottoming formation initiated last week runs its course. Indeed, this could extend to 1.2650 before sellers return. 1.24- plus was seen early in Europe, although each time this ran into selling. This perhaps reflects some natural USD support ahead of today’s FOMC meeting, although 1.2345-55 needs to break to see this being extended through North American trading. Indeed, there could be some fun and games today if the Fed changes its statement, which is a possibility (see below for preview), although this may not be USD negative and could actually turn out to be positive if a hawkish spin is put on the matter.

Cable did well yesterday and technically it looks fairly clear up to 1.80, although tomorrow’s Inflation Report may just keep things in check for now. A report devoid of fresh dovish shocks is required to keep the GBP recovery going. The BRC survey released last night suggests that conditions are still challenging for retailers, while trade data this morning was a little more encouraging (albeit just one month of data).

Day Ahead
US – productivity and unit labor costs data is due today although the FOMC meeting will be the major highlight. Unit labor costs are something the FOMC will be anxiously watching after the strength seen in recent quarters. The chart shows the y/y rate, while the annualised q/q growth rates over recent quarters have read as follows – Q105 +3.3%, Q404 +7.7%, Q304 +4.5% and Q204 +1.8% - so the pressure has been fairly constant. Alongside the strength in energy and other raw materials prices it is no surprise that the Fed remains a little nervous about potential price pressures, even though early year strength in core consumer price inflation has abated somewhat.

As noted in the Week Ahead Preview, there is an outside chance of the FOMC changing their statement somewhat today. The intention here would not be to signal that rates rises are coming to an end or that they will even slow up a little, but merely to get away from the language about removing policy accommodation. The reasoning is fairly straightforward. The funds rate is now approaching an area that some FOMC members may feel is bordering on neutrality, so to term the rates hikes as ‘removing policy accommodation’, may no longer be entirely accurate as far as these members are concerned. This will happen at some point. If they were to do this it could cause a surprise to markets, which the Fed does not like doing, so it is likely that the rest of the statement would be keen to convey the idea that more tightening is still to come. In fact, if they overdid the latter the market could end up taking the statement hawkishly i.e. that the funds rate is no longer confined by an area of neutrality but can start to move into outright tighter territory.

Diary
Data/event EDT Consensus*

US Chain store sls (w/e Aug 6) w/w 07.45 +0.9% last
CA Housing starts (Jul) 08.15 225k
US Productivity (Q2, 1st est) saar 08.30 +2.0%
US Unit lab costs (Q2, 1st est) saar 08.30 +3.0%
US Redbook sls (w/e Aug 6) m/m 08.55 +0.3% last
US FOMC meeting outcome 14.15 3.5%
US ABC consumer conf (w/e Jul 10) 17.00 -11 last

Latest data Actual Consensus*
GB BRC retail survey (Jul) y/y -1.9% -0.5% last
AU Housing finance (Jun) m/m -0.9% -1.0%
AU NAB business survey (Jul) +7 +11 last
JP Machinery orders – core (Jun) m/m +11.1% +6.5%
DE Trade balance (Jun) €16.8 €13.0bn
DE Exports (Jun, sa) m/m -0.4% +3.6%R last
DE Current account (Jun) €10.4bn €6.0bn
DE WPI (Jul) y/y +2.5% +2.4%
GB Global trade balance (Jun) -£4.3bn -£4.9bn
GB Non-EU trade balance (Jun) -£1.4bn -£2.4bn
SE Unemployment rate (Jul, nsa) 6.0% 6.1%
* 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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15:30 US- EIA Crude
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13:30 CA- CPI & Retail Sales
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