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Thursday August 11, 2005 - 10:46:57 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY remains firm as Nikkei/TOPIX storm to 4-year highs.

• Below 109.70-110 would see more position liquidations on USD-JPY.

• EUR-USD still has short-term upside risk, but it is heavy going.

• GBP can improve further after MPC, but November rate cut risk still in place.

• Norges Bank meeting and US retail sales feature today.

Market Outlook

The JPY has remained firm after USD-JPY broke below 110.75 yesterday and this should persist in the short-term. Support now comes in at 109.70-110.00 and the big issue is whether the market sees the post-election environment favourably enough to push below this area. While it is not clear that the market will be comfortable in having enough certainty on this issue, the additional downside risk for USD-JPY comes from the positioning backdrop that has built up in recent months. There are likely to be short JPY positions in abundance and liquidation risk alone suggests a good chance of a further break lower in the short-term.

EUR-USD continues to mess about on a daily basis and the move will be in danger of running out of steam if further upside progress cannot be made in the next couple of days. 1.2450- 1.2500 is still a risk today or tomorrow and how it ends the week may well be determined by tomorrow’s monthly US trade data.

GBP bounced back yesterday after the MPC rapped the market’s knuckles over the extent of the rate cuts it had been discounting a few weeks back. The portrayal of CPI projections under different interest rate assumptions clearly shows that they do not currently feel to be in a position to cut rates any further at the present time. However, by stating that there are downside risks to both GDP and CPI they have laid down a route to a possible further forecast downgrade in November, which will necessitate a further easing in policy (our preferred scenario). Weak data between now and then would be the obvious trigger and retail sales data next week could easily disappoint after the ‘strong’ June data that was probably inflated by early summer discounting. In the short-term, GBP should have further to go (0.6875 on EUR-GBP has already been tested this morning and 0.6840 would follow if the former level breaks), but the move may be short-lived. Rate cut expectations have now been eliminated in the UK money market and this may be overdoing it somewhat.

US monthly budget data released yesterday confirmed the ongoing trend of improvement, with the cumulative deficit in the first 10 months of the financial year now standing at $303.1bn compared to $396.3bn at the same stage last year. There are just two months to go for this financial year and it looks as if the government’s forecast of $333bn (revised lower last month) will be undershot. If recent trends continue (a sizeable ‘if’ perhaps given the potential for volatility in this data), an outcome around $300-$310bn could be seen. Even a repeat of the monthly outcomes seen in the previous year would leave the total at $319.6bn. This is still a large deficit, but it is at least pointing in the right direction after the $412.8bn number seen last year.

Australian labour market data was stronger than expected in terms of the headline employment number (+12.2k) and even a 14.5k fall in full-time employment failed to stop the AUD responding positively to the report. Above 0.7740 is needed to keep this going. A strong labour market report was also seen in New Zealand and the rally in the NZD back above 0.6950- 0.7000 is potentially significant. However, whether the boost to the NZD is extended or reversed in the next 24 hours will depend in part upon tonight’s retail sales data (see below), as well as the general tone of the USD.

EUR-SEK continues to trade heavily and below 9.3160 would extend short-term downside risk to 9.28-30. The headline CPI was a little softer than expected today and this initially caused EUR-SEK to move higher, although the previous month’s rise in the core y/y rate to +0.7% was maintained so it was not really bad news.

Day Ahead
Norway – the Norges Bank announces their latest policy decision and an unchanged rate outcome seems most likely. They hiked rates on June 30 but stated that rate adjustments were likely to be small and infrequent. Key at this meeting is whether this description of the likely policy process is maintained. With activity in Norway robust and recent fears about a weakening in the Eurozone economy having subsided there is a slight risk of a change, although it will probably be left unaltered for now.

US – retail sales, business sales and business inventory data are released today. Retail sales have been generally firm in recent months and another solid showing looks likely for July. Business sales have also been reasonably good, although last month (May) they did slip a little. Overall, today’s data is unlikely to disturb sentiment about what is happening in the US economy. Indeed, it will be interesting to see whether the USD is more receptive to the notion of US data strength.

New Zealand - New Zealand retail sales is out tonight and will be watched to see whether last month’s weakness (-0.6% m/m) is sustained. The outcome could have a bearing on market sentiment about ongoing RBNZ rate hike risk. At its last meeting, the RBNZ said that the risk of higher rates remained in place, but acknowledged that some pieces of data had been weaker (one of which was retail sales).

Data/event EDT Consensus*

NO Norges Bank policy outcome 08.00 2.0%
ZA SARB policy outcome 08.30 7.0%
US Retail sales (Jul) m/m 08.30 +2.0%
US Retail sales ex-autos (Jul) m/m 08.30 +0.7%
US Business inventories (Jun) m/m 08.30 +0.1%
US Business sales (Jun) m/m 08.30 -0.1% last
US Initial claims (w/e Aug 6) 08.30 315k
US Continuing claims (w/e Jul 30) 08.30 2581k last
NZ Retail trade (Jun) m/m 18.45 +1.1%
JP GDP (Q2 2nd est) q/q 19.50 +0.5%
AU RBA’s MacFarlane policy testimony 23.00

Latest data Actual Consensus*
US Federal budget balance (Jul) -$52.8bn -$56.7bn
NZ Unemployment rate (Q2) 3.7% 3.9%
NZ Employment (Q2) q/q +0.5% +0.3%
JP Current account (Jun, sa) Y1.5trn Y1.4trn
AU Employment (Aug) 5.0% 5.0%
AU Unemployment rate (Aug) +12.7k -2.5k
CN CPI (Jul) y/y +1.8% +1.5%
CH Consumer confidence (Jul) -15 -8
DE GDP (Q2, 1st est) q/q 0.0% 0.0%
ES GDP (Q2, 1st est) q/q +0.9% +0.9%
NL GDP (Q2, 1st est) q/q +1.2% -0.8% last
SE CPI (Jul) y/y +0.3% +0.5%
SE CPI UND1X (Jul) y/y +0.7% +0.7%
IT GDP (Q2, 1st est) q/q +0.1% +0.2%
EU GDP (Q2, 1st est) q/q +0.3% +0.3%
* 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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