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Tuesday December 6, 2005 - 12:13:09 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD set to range trade ahead of FOMC meeting.
• Focus remains on other currencies like NZD, AUD, CAD and the JPY.
• Brown delivers usual smoke and mirrors. GBP hurt by weak manufacturing.
• Swedish GDP helps EUR-SEK below key short-term support.
• US unit labour costs and BoC policy announcement feature today.

Market Outlook

Yesterday’s rally in EUR-USD was motivated by a combination of the EUR catching up with other currencies against the JPY (EUR-JPY breaking above 142.00) and a more sober assessment of the event risk regarding next week’s FOMC meeting. This should see EUR-USD range trading in the short-term, leaving the focus on the JPY and some of the other currencies like the NZD, AUD and CAD that have been the recent outperformers (see below).

Australia trade and housing finance data last night failed to excite the market any further, with the AUD currently being supported by gold price strength and as one of the preferred vehicles out of JPY. Tonight’s GDP data will also need to be unusual to move the AUD, while the RBA announcement should be a non-event. Technically, there is room up towards the 0.7600 level in the short-term, although some corrective activity to 0.7450-70 could be seen initially after recent advances if 0.7500 gives way. Above 0.7540 would suggest a continuation of gains.

The NZD reached resistance at 0.7200 yesterday and it is touch and go whether this will hold it ahead of Wednesday night’s RBNZ decision. The NZD has come a long way in recent weeks, against both the USD and the JPY and while the interest rate attractions remain strong, especially against the JPY, there is a risk of some corrective activity. 86.70, 86.40 and 85.85 are all levels which if broken would raise some correction threat on NZD-JPY.

USD-CAD yesterday broke below the previous 2005 low at 1.1588 and in doing so also reached its lowest level for almost 14 years. This opens downside risk in the short-term, as long today’s BoC announcement does not offer any bad news (see below).

Brown’s pre-Budget Report was characterised by what is becoming a familiar theme – a combination of jiggery pokery on the timing of the economic cycle, so he can hit his so-called Golden Rule and further measures aimed at transferring resources from the private to the public sector. None of this has enough shock value in isolation to really affect the market, although such developments can only damage underlying GBP fundamentals. The cycle was extended by a further three years on this occasion to help avoid the need for possible tax rises, while oil companies will be picking up some of the bill for shoring up revenues (roughly an extra £6bn over the next three years). It is usual at this time of the political cycle to get the bad news (higher personal taxes/lower spending) out of the way, but not for this Chancellor, who perhaps has his own political cycle in mind - that of replacing PM Blair without tainting his own popularity.

The main independent negative for GBP this morning came via the much weaker than expected performance in manufacturing output, which fell 0.7% in October after declines of 0.4% and 0.2% in September and August respectively. This helped to push EUR-GBP back above intra-day resistance at 0.6780, although it may be difficult to get through the 0.6800-25 area in the short-term. Last night’s BRC retail survey released last night showed y/y growth in like-for-like sales hitting the highest level (a still lowly +0.8%) since March when an early Easter boosted sales growth. This is inconsistent with the very weak scenario painted by last week’s CBI survey and will create some market uncertainty about sales going into the key Christmas period.

Yesterday, EUR-SEK was engaged in a real battle around the support area at 9.40-9.43 and on the basis of this morning’s price action it looks like it has given way, although a close below 9.40 is needed to confirm it and early North American trading should be a good indication of where direction will lie. A move down towards the 9.30-9.35 area would likely follow initially, although this should hold it going into the New Year.

Day Ahead
UK – the latest NIESR estimate of GDP is out tonight and on the basis of today’s weak manufacturing output there will be some downside risk to the outcome. NIESR 3mth/3mth GDP estimates have been either +0.4% or +0.5% in each of the last five months.

US – unit labour costs will be monitored given its relative importance as an inflation indicator, although the initial estimate was a soft -0.5% annualised rate and this should be revised down even further. Factory orders will also be watched for any major revisions to the ex-transport durables component, the initial estimate of which was released last week.

Canada – a 25bp rate hike seems likely today and the BoC should also signal the likelihood of further rate rises over coming months, even though they will stress the need to monitor a number of factors including economic performance at home and the state of global demand. The message should be CAD supportive.

Data/event EDT Consensus*

US Chain store sls (w/e Dec 3) w/w 07.45 -0.7% last
US Productivity (Q3, 2nd est) saar 08.30 +4.4%
US Unit lab costs (Q3, 2nd est) saar 08.30 -0.7%
CA Building permits (Oct) m/m 08.30 -0.5%
US Redbook sls (w/e Dec 3) m/m 08.55 +0.3% last
CA BoC policy announcement 09.00 3.25%
US Factory orders (Oct) m/m 10.00 +2.1%
CA PMI (Oct, nsa) 10.00 63.3
US ABC consumer conf (w/e Dec 4) 17.00 -15 last
AU RBA rate announcement 17.30 5.50%
GB NIESR GDP (3mths to Nov) q/q 19.01 +0.4% last
AU GDP (Q3) q/q 19.30 +0.5%

Latest data Actual Consensus*
GB BRC retail survey (Nov) y/y +0.8% -0.2% last
AU Housing finance (Oct) m/m +1.1% +1.5%
AU Trade balance (Oct) -A$1.33bn -A$1.45bn
JP Overall PCE (Oct) y/y +2.0% +1.8%
SE GDP (Q3) q/q +1.0% +0.9%
NO GDP – total (Q3) q/q +0.8% +0.7%
NO GDP – mainland (Q3) q/q +0.8% +0.8%
GB Ind prod (Oct) m/m -1.0% +0.2%
GB Manu output (Oct) m/m -0.7% +0.2%
DE Manu orders (Oct) m/m +2.0% +0.5%
* 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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