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Wednesday December 21, 2005 - 11:32:32 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• USD strength slowly returning – EUR-USD pressuring 50-day moving average.
• Further USD-JPY stabilisation likely.
• NZ current account deficit bad but fairly well anticipated.
• UK MPC minutes show a dissenter - CBI retail sales rebound could be statistical noise.
• Final Q3 US GDP, Canadian retail sales feature today.

Market Outlook

EUR-USD moved sharply lower yesterday although as yet it has failed to sustain the initial move below the 50-day moving average at 1.1873. The crossing of the 50-day moving average has been the trigger for some sizeable short-term moves this year. Indeed, the move above it on Dec 12 (1.1890 at the time) was a key factor motivating the break higher prior to the FOMC meeting. Last minute Homeland Investment flows could be contributing to USD strength.

Downside is favoured in the weeks ahead on the basis of US data support but a move today would depend upon it breaking free of the 50-day moving average. Below the 1.1840 low seen in the NY afternoon yesterday would be a sign that it has done this. The rest of the week’s US data including new home sales and durable orders may also be important.

USD-JPY also looks better and this could extend to 117.60 today. 118.20 and 119.50-120.00 are the next significant levels/areas after this.

The New Zealand current account deficit came out higher than the consensus, but the NZD has failed to sustain the losses seen initially after the release. This was probably due in part to the fact that the market had been fretting about this number all week and the NZD had already given up some ground ahead of it. Still, the deficit reading of 8.5% of GDP for the 12-months ending Q3 is not a pretty sight and will maintain market worries about the sustainability of NZD strength, especially if cyclical factors also start to turn. Above 0.6840 is required today to offer hope of some stabilisation – support is at 0.6780 ahead of 0.6740 and then the 2005 low (July) at 0.6685. Upside is tentatively favoured near-term, but this could easily be short-circuited if the USD starts to advance against the EUR. New Zealand GDP is due tonight and while ‘old’ being for Q3 an unusual number could influence sentiment.

UK MPC minutes were a little surprising, showing an 8-1 vote in favour of unchanged rates, with the one dissenter, Nickell, voting for a 25bp rate cut. For most members little had changed since the November Inflation Report and while some thought that the risks to growth were still to the downside, evidence about how the consumer had fared over the crucial Xmas and New Year period would not be available for some time. They also saw some residual uncertainty in the inflation outlook, although part of this may have been resolved following the broad array of soft inflation numbers seen last week. Nickell saw the biases to the downside and much less risk on the inflation outlook. Overall, the risk is clearly for another rate cut, although there would need to be clear evidence of a very weak retail performance over Xmas and New Year for this to happen as soon as February. This may be difficult, especially as the January retail sales data is not out until after the February MPC meeting.

GBP will be highly sensitive to firm evidence on the retail sectorover coming weeks and there was a much stronger than expected CBI retail survey released late in the morning. The zero balance regarding y/y sales volume growth comes after the record low of -35 seen in November, suggesting that what we may be seeing is the type of volatility that can often materialize on most retail series around this time of the year. However, it may offer some element of support to the notion that spending maybe OK this Christmas. EUR-GBP remains in a 0.6750-0.6825 range.

Day Ahead
US – the final estimate of Q3 GDP is unlikely to cause any drama in the market, while Q3 core PCE prices are also likely to remain subdued.

Canada – retail sales are out today and there is a risk of a weaker number on the ex-autos category after the sharp +1.7% m/m gain seen last month. Overall BoC rate hike expectations will likely remain intact.

Data/event EDT Consensus*

US GDP (Q3, final) saar 08.30 +4.3%
US Core PCE prices (Q3) saar 08.30 +1.2%
CA Retail sales (Oct) m/m 08.30 +0.3%
CA Retail sales ex-autos (Oct) m/m 08.30 -0.4%
NZ GDP (Q3) q/q 16.45 +0.3%
JP Tertiary index (Oct) m/m 18.50 +0.7%
JP All-industry index (Oct) m/m 18.50 +0.5%
JP Trade balance (Nov, sa) 18.50 ¥807bn

Latest data Actual Consensus*
NZ Current account (Q3) -NZ$5.1bn -NZ$4.8bn
US ABC consumer conf (w/e Dec 18) -11 -13 last
FR H’hold consumption (Nov) m/m +1.1% +0.5%
IT Consumer confidence (Dec) 108.2 108.5
GB MPC minutes (Dec 7-8 meeting) 8-1 9-0
GB CBI retail trades survey (Dec) 0 -35 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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