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Friday October 7, 2005 - 10:13:13 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - European Edition

Key Points
• Significant bounce for EUR-USD, as ECB introduces rate hike risk into the picture.
• ECB comments mean that the market will be more responsive to Eurozone data.
• GBP now looks vulnerable against the EUR given diverging rate risks.
• German manufacturing, Canadian employment, US employment feature today.

Market Outlook

Comments by Trichet yesterday suggest that the ECB has adopted a tentative tightening bias, although it is still a long shot that this will translate into a rate hike before year-end. Much of what he said yesterday was typical central bank talk, along the lines of the need to be vigilant about energy price induced CPI strength being embraced by wage demands, which would in turn boost core CPI. Indeed, this type of rhetoric from the ECB is not unusual at this time of the year, as they try and warn against wage negotiations between now and the spring. However, yesterday’s remarks carry more teeth because economic activity data has picked up so impressively in recent months - in contrast to the weakness in place earlier in the year. The ECB acknowledges that risks to growth remain in place and also that currently core CPI remains subdued, so there does not appear to any urgency in their discussions about the merits of a rate hike. However, Trichet was happy to state that yesterday’s meeting did discuss the pro and cons of a rate hike compared to unchanged rates, while a rate cut did not feature. This is now the bias but more evidence of economic solidity will be required before they press the button.

This is a significant development for the EUR. The market had become so accustomed to the prospects of unchanged ECB rates that the stronger data background in the Eurozone had been largely ignored. This may now change and is another factor, as well as the technical positives relating to the bounce back above 1.2100, why EUR-USD now looks underpinned. It has been a choppy week in terms of sentiment shifts and today’s US employment report may offer one last twist. How things settle this week will provide more clarity about what lies ahead, although as it currently stands EUR-USD now appears to have failed in its latest attempt to break key levels (lows from 2004 and 2005) and could now push higher. Above 1.2240-70 is required for it to take that extra step.

The implications of the change in ECB sentiment have also not been lost on GBP. The risk to UK rates remains on the downside, but the introduction of upside risk to ECB rates offers a better story for EUR-GBP upside. The break above 0.6853 is significant and as long as it can hold above there, upside risk to the 0.6960-90 area will be in place.
DT Wednesday June 8 2005
Day Ahead
Eurozone – yesterday’s sharp fall in German manufacturing orders suggests a similar development for German manufacturing output today. Both series have been strong in recent months and a pullback in output as well as orders would not be a surprise. In fact it would not undermine the overriding uptrend currently in place.

Canada – labour market data is out in Canada and any unusual developments will have potential to influence both BoC sentiment and the CAD. Profit-taking has hit the CAD in the past few days, in part because of the pullback in the oil prices, with CAD strength having been associated with past oil price gains. However, weaker oil prices will also soften some of the concerns the BoC aired last month about the impact higher energy prices could have on global demand, so it is not all bad news for the CAD – rate hike prospects have improved. USDCAD upside should prove to be temporary and downside is still favoured unless the Canadian data suddenly starts to disappoint.

US – the employment report is today’s main feature and the 3- mth average shown in the chart above has been incredibly stable over the past year or so. Today’s data will of course be significantly disrupted by Katrina and the market will be looking to the Bureau of Labor Statistics (BLS) to provide clear guidance about how much of he payroll loss is down to this factor. This will at least leave the market in some kind of position to calculate an underlying number, although even then the market may be wary about reading too much into the data with so much noise around.

Data/event EDT Consensus*

NO Manu output (Aug) m/m 09.00 +0.4%
DE Ind prod (Aug) m/m 11.00 -0.5%
CA Employment (Sep) 12.00 +20k
CA Unemployment rate (Sep) 12.00 6.8%
US Non-farm payrolls (Sep) 13.30 -150k
US Unemployment rate (Sep) 13.30 5.0%
US Average workweek (Sep) 13.30 33.7
US Hourly earnings (Sep) m/m 13.30 +0.2%
US Consumer credit (Aug) 20.00 +$5.0bn
US Fed’s Moskow speaks

Latest data Actual Consensus*
GB NIESR GDP (3mths end Sep) q/q +0.3% +0.5% last
JP Overall PCE (Aug) y/y -0.6% -1.5%
CH Unemployment rate (Sep, sa) 3.8% 3.8%
* 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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