Monday December 12, 2005 - 11:34:38 GMT
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Mellon Bank Foreign Exchange - https://fx.mellon.com/
Forex: Mellon FX Daily - U.S. EditionKey Points
• USD softens up a little further ahead of FOMC, but upside favoured after Tuesday.
• Chinese comment also hurts USD.
• JPY weakness continues despite ongoing build-up in short positioning.
was fairly soft in Asia and weakened further in Europe this morning with liquidation risk showing itself ahead of tomorrow’s key FOMC meeting.
There is a fear that the Fed may signal a pause in tightening, but it is just as likely (more so nin our view) they signal that rate hikes are not set to end just because a substantial amount of policy accommodation has now been removed. The key factor for the price action this morning has been the liquidation risk involved. The market has been long USDs and any pre-FOMC liquidation will tend to favour USD downside.
An additional catalyst for USD weakness this morning was a comment from Chinese official
economist Yu Yongding who said that China and other Asian central banks must come up with a plan to slow the rate of accumulation of USD and to eventually cut their holdings. There is no doubt that this is an issue, but the market is well aware of it and there was nothing really new revealed today. Also note that Yu has been the source of controversial comment in the past. Late last year he was quoted as saying the Chinese central bank had been selling USDs, only for him to clarify later that he was merely referring to the slower rate of accumulation of Treasuries by China reported in the US TIC data.
Key between now and tomorrow’s FOMC will be whether 1.1900 can hold on EUR-USD.
Above there would trigger further liquidation, although we would favour renewed downside after the meeting. The extent of such downside may depend in part upon the week’s data releases (retail sales, CPI, NY/Philly Fed surveys, trade deficit, Q3 balance of payments and the latest TIC portfolio report). The Fed statement and the implications this will have for general USD performance will mean that the market treads carefully on most crosses today.
One theme that has continued today has been the weakness of the JPY,
which has fallen further against the EUR and GBP and resumed its fall against the AUD and the NZD. A further round of JPY weakness looks likely going into year-end given the lack of any prospects about a BoJ rate hike. This week’s Tankan survey is unlikely to be strong enough to change this scenario. USD-JPY needs to break above 121.40 to suggest an extension higher and this is favoured after Tuesday’s FOMC meeting. The only constraint to further JPY weakness is the extent to which short positioning has already built up, with net longs on USD-JPY for IMM specs reaching a fresh high as of last Tuesday. However, such is the strength of the current theme it is unlikely that this is going to unwind just yet.
this morning was largely uneventful. Core PPI output remains subdued, while the CBI survey showed continuing softness in output and a modest pick-up in orders, albeit from low levels.20 EST Monday December 12
Data/event EDT Consensus*
US Federal budget balance (Nov) 14.00 -$76.5bn
Latest data Actual Consensus*
JP Domestic CGPI (Nov) y/y +1.9% +1.9%
JP Current account (Nov, sa) ¥1.67trn ¥1.4trn
CN CPI (Nov) y/y +1.3% +1.4%
GB PPI input (Nov) m/m +1.4% -0.3%
GB PPI output (Nov) m/m -0.2% 0.0%
GB PPI output core (Nov) y/y +1.2% +1.3%
GB ODPM house prices (Oct) y/y +2.2% +3.1%
GB CBI manu survey orders bal (Dec) -22 -25 last
* 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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