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Wednesday December 7, 2005 - 11:33:13 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY corrects against number of currencies – especially AUD and NZD.
• USD also stronger but EUR-USD should remain well supported ahead of FOMC meeting.
• USD-CAD back above 1.1600.
• US Challenger lay-offs, consumer credit feature today – Australian employment and RBNZ outcome tonight.

Market Outlook

A fair amount of choppiness overnight, initially led by some movement in Asia on the JPY crosses, which then spilled over into some general USD strength. The big movers initially were the AUD and the NZD. The NZD started the ball rolling by breaking below intra-day support at 0.7160 and shortly after that a weaker than expected Q3 GDP number out of Australia hit the AUD and the NZD. There was also some attention drawn to a report from S&P, which left NZ ratings unchanged but highlighted the current account deficit and the possibility of currency depreciation as a future risk. Both the AUD and the NZD also probably suffered from AUD-JPY and NZD-JPY moving through key levels - 86.40 being key in this regard on NZD-JPY, 91.00 on AUD-JPY. Both these crosses have moved considerably, without correction, in recent weeks and a pullback was a natural risk.

Once Europe opened, JPY strength spilled over into other crosses like the EUR and GBP and with USD-JPY holding its ground the USD managed to advance against European currencies and a little further against the NZD and AUD. However, it seems unlikely that much more will happen on EUR-USD, with the market possibly now on hold until next Tuesday’s FOMC meeting. Support comes in at 1.1695-1.1700, while 1.1820 needs to break to prompt some minor corrective activity. This is possibly the greater risk between now and Tuesday, even though we favour EUR-USD downside over the following weeks. There is an outside chance of USD-JPY pulling back closer to 120.00-25 before rallying further.

It seems unlikely that Japanese appetite for high-yields will diminish, although a period of consolidation may now follow for the AUD and NZD after the shock of last night’s price action. The response to tonight’s RBNZ announcement, where a further 25bp rate hike is expected, will provide some clues about the immediate appetite for NZD. The threat of further tightening is likely to remain in place, but they are also likely to reiterate recent comments about the current account deficit being a danger to the NZD. Also due tonight is the latest Australian labour market data. The market is expecting a rise in employment after two months of declines and if this is not forthcoming it may weigh further on the AUD in the very shortterm. Short-term supports on AUD and NZD now stand at 0.7450 and 0.7030 respectively.

The BoC statement yesterday was not CAD negative, but it failed to offer fresh momentum for USD-CAD and the move back above 1.1600 slightly complicates the short-term outlook. Downside is still favoured overall, but a pullback to 1.1675 or 1.1735-50 may be seen initially.

A speech by SNB chief economist Kohli this morning failed to offer any comment on immediate policy issues, where there has been some speculation about a 50bp rather than a 25bp rate hike next week. 3m LIBOR has risen sharply in recent weeks and now stands at 1.05%, well above the current target (0.75% mid-point of a 0.25%-1.25% range). It is clear that the current level of interest rates remains too low given recent developments in the economic data. Furthermore, the very low rate levels undertaken in 2002/03 were motivated in part by the safe haven strength of the CHF against the EUR (1.45-1.48 for much of that time) and this has also disappeared. The mid-point target for 3m LIBOR was hiked twice in 2004 to 0.50% then 0.75% and on the face of it a 1.25% rate (still very low) would not be out of the question. However, it would be uncharacteristic of the SNB to carry out a move of this magnitude. Main short-term support on EUR-CHF is at 1.5350.

Data/event EDT Consensus*

US Challenger layoffs (Nov) 10.00 81k last
US Consumer credit (Oct) 15.00 +$4.8bn
NZ RBNZ rate announcement 15.00 7.25%
JP M2 plus CDs (Oct) y/y 18.50 +2.0%
AU Employment (Nov) 19.30 +15k
AU Unemployment rate (Nov) 19.30 5.2%
JP Machinery orders – core (Oct) m/m 00.00 +6.0%

Latest data Actual Consensus*
US ABC consumer conf (w/e Dec 4) -14 -15 last
AU RBA rate announcement 5.50% 5.50%
GB NIESR GDP (3mths to Nov) q/q +0.4% +0.3% last
AU GDP (Q3) q/q +0.2% +0.5%
CH Unemployment rate (Nov, sa) 3.7% 3.7%
NO Manu output (Oct) m/m -0.5% +0.4%
* Consensus unless stated
12mth cumulative sum, mlns

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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