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Thursday September 15, 2005 - 10:52:19 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD breaks lower – further weakness likely.
• Big jump in Japanese equities should support the JPY.
• UK retail sales soft - RBNZ hawkishness not that emphatic.
• SNB policy announcement due – outside chance of tightening.
• US CPI, business sales/inventories, NY and Philly Fed indices also feature.

Market Outlook

EUR-USD finally broke free of support around 1.2260 in Asia and has remained generally soft through the European morning. Downside risk remains in place with supports coming in at 1.2170 (which should hold today) and 1.2125. The latter needs to break to really focus attention on the lower end of the range below 1.20 but a trendline of sorts that had been supporting the rally since early July has now broken after last night’s price action and this will convey a natural negative bias over the next couple of days.

However, the market will no doubt proceed cautiously given the events scheduled for the coming week. Q2 balance of payments and monthly TIC data are due tomorrow and if there are no fresh negatives this would be another barrier for the USD that will have been overcome. However, the market may not be entirely happy on taking a view until it has heard what the Fed has to say next week about medium-term rate prospects.

Furthermore, uncertainty about the German election has also been a key factor behind the inability of EUR-USD to bounce in recent days. How this turns out at the weekend will also be significant for EUR-USD direction next week. US data today will also hold some significance (see below).

The stronger USD has been supporting USD-JPY, although the large jump in Japanese equities today suggests that postelection optimism may be coming to the fore again. This should be JPY positive insofar as it reflects overseas interest in Japanese equities. BoJ deputy governor Iwata spoke again this morning reiterating his belief that core CPI may soon be on the rise.

The RBNZ left rates unchanged and offered no clear indication that rates would definitely be rising in the short-term. They did believe that further policy tightening could still prove necessary to keep CPI within a 1%-3% band (it saw a fuel boosted headline CPI at 4% over coming quarters, before returning to below 3% beyond that). Their base projection for the 3-mth bill rate was a touch higher than that seen previously and incorporates another hike. However, this should be seen as an indication of policy bias rather than a guarantee of what will happen to rates. They identified the impact of oil prices on global economic growth and the post-election stance of fiscal policy as two major sources of uncertainty in the medium-term and concluded that it would be several months before the impact of these factors could be clarified. The NZD has been on the defensive since the announcement, helped in part by the weaker EUR-USD and this could extend closer to key shortterm support at 0.7000 today.

UK retail sales data was weaker than expected, with the zero m/m outcome for August being supplemented by a downward revision (-0.6% from -0.3%) for July. However, the report is not inconsistent with the anecdotal gloom that has been unearthed in other surveys of the retail sector and the latest data was dragged down by some unusual weakness in the food category. Food sales fell 1.2% m/m and this alone took 0.5% off the headline rate. Still, the data was enough to send into reverse some of the EUR-GBP decline seen over the past week. Above 0.6770 is required to keep this going up to a trendline currently at 0.6790.

Day Ahead
Switzerland – various SNB members have been making noises about the fact that the current low level of interest rates cannot last forever and that growth prospects appear to be improving, but the market is not expecting a hike today. Still, there is an outside chance of a move; especially as the next policy review is not until December. The SNB can of course change policy anytime they like, but intra-review moves are usually in response to undesirable movements in the CHF rather than normal economic circumstances. Other than the risks to growth posed by energy prices the Swiss data has been encouraging over the past few months. This should at least ensure that they signal the likelihood of some ‘normalisation’ in rates if the data continues to proceed along current lines.

US – CPI is unlikely to have that much influence on the market, as in recent months the core CPI has bee extremely subdued (+0.1% m/m in each of the past three months) and the FOMC is more interested in the core PCE price index anyway. Business inventories data is also out but as they have been generally outpaced by the growth in business sales (also released today) there have been no major demand problems as yet. The main focus today will be on the NY and Philly Fed indices to see how manufacturing activity is faring in the current high energy price environment. Last month, both of these Fed indices were fairly robust, but the weaker ISM manufacturing number that followed earlier this month has raised a few question marks.

Diary
Data/event EDT Consensus*

SE Unemployment rate (Aug) m/m 07.00 6.8%
CH SNB rate announcement 08.00
US CPI (Aug) m/m 08.30 +0.5%
US CPI core (Aug) m/m 08.30 +0.2%
US NY Fed index (Sep) 08.30 15.0
US Business inventories (Jul) m/m 08.30 +0.2%
US Business sales (Jul) m/m 08.30 +0.8% last
US Initial claims (w/e Sep 10) 08.30 350k
US Continuing claims (w/e Sep 3) 08.30 2608k
US Philly Fed index (Sep) 12.00 13.5

Latest data Actual Consensus*
NZ RBNZ rate announcement 6.75% 6.75%
JP Consumer confidence (Sep) m/m 48.4 48.2 last
NO Trade balance (Aug) m/m NOK29bn NOK24bln
GB Retail sales (Aug) m/m 0.0% +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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