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Thursday January 26, 2006 - 13:08:05 GMT
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Forex: Mellon FX Daily - European Edition

Key Points
• EUR-USD disappoints but remains well above key support.
• Price action reflects some hesitancy ahead of key events in next few weeks.
• RBNZ adopts less alarmist stance on NZD and economic prospects, removing immediate pressure on NZD, but overall downside risk remains.
• US durable orders, initial claims, BoC Policy report feature today.

Market Outlook

A slightly worrying day yesterday for EUR-USD, failing to rally in spite of what should have been supportive news. The German IFO was much stronger than expected, supporting arguments about the need for the ECB to pull interest rates further away from current low levels, while US existing home sales were weaker than expected, reinforcing concerns about one of the potential pressure points for the US economy. If there was a supporting factor for the USD and US rate arguments it came via the oil price, which retreated further. So far it is not that serious for EUR-USD, as it remains well clear of key support levels at 1.2165-85 and technically there is still room up to 1.2360 ahead of 1.2500.

However, the price action is consistent with a market that remains uncertain about how relative rate arguments will proceed in coming months or to be more exact how much cash to put behind such arguments. In this regard EUR-USD may need to be cajoled higher by appropriate information and Friday’s US GDP and next week’s FOMC meeting will be significant in this regard. However, the really big event will be new Fed chairman Bernanke’s semi-annual Monetary Policy testimony scheduled for February 15.

The NZD received support from the less alarmist RBNZ statement that accompanied their unchanged rate announcement. Recent official verbal interventions have been full of dire warnings about the downside risks for both the economy and the NZD, but the tone was very different on this occasion. Perhaps they feel a need to step back after orchestrating recent declines and do not want to overtly upset Japanese Uridashi investors too much. On interest rates they said that an early cut was unlikely, as it would probably take time for current inflation pressures to subside. However, they did state that further rate rises were unlikely, while also making the point that this could not be completely ruled out until there was evidence of a sustained weakening in domestic demand.

The NZD dipped below 0.6840 in the couple of minutes before the RBNZ announcement but rallied thereafter and has managed to sustain these gains through the Asian session. As a consequence it looks slightly better grounded and it could be a case of ‘pressure off’ for the time being, leaving some possible room up to 0.6920. However, the vulnerabilities previously highlighted by the RBNZ are still in place and for these reasons one should tread very carefully (if at all) in chasing any short-term gains. Downside risk remains overall – 0.6700 major support – although a catalyst like some evidence of weakening domestic demand, a further deterioration in the current account deficit or fresh official warnings may be required. Below 0.6760 would be a clear warning sign. NZ PMI is due today, although it is a slightly volatile animal.

Day Ahead
US – durable orders data is due and while there have been m/m declines in the ex-transport orders series over past few months, this needs to be seen in the context of the very strong growth that went before (Nov -0.6%, Oct -0.1%, Sep -0.1% after +5.1% in Aug). As a consequence any ‘trend’ measure of the series (see chart) still looks fairly decent. Also keep an eye on jobless claims, which showed some improvement last week. This series can be volatile around the turn of the year but it will be interesting to see how much of last week’s move is sustained. The latest 4-week moving average of 299k was the lowest since July 2000.

Canada – the Bank of Canada releases its Monetary Policy Report and the market will be looking for more qualification to the comment on Tuesday about “some modest further increase” in rates being required.

Japan – tonight’s CPI will be closely watched after the core y/y rate moved back above zero last month. If this keeps going in the right direction there will be increasing speculation about the BoJ jettisoning the quantitative easing element of the current policy regime. An end to zero rates is unlikely to happen until 2007, but it may require an inflation target to emphasise this point to the market.

Data/event EDT Consensus*

SE Retail sales (Dec) m/m 08.30 -0.2%
SE Consumer confidence (Jan) 08.30 13.0
NZ PMI (Dec) 12.00 52.3 last
US Durable orders (Dec) m/m 13.30 +1.0%
US Durables ex-transport (Dec) m/m 13.30 +0.9%
US Initial claims (w/e Jan 21) 13.30 305k
US Continuing claims (w/e Jan 14) 13.30 2534k last
CA BoC Monetary Policy Report Update 15.30
JP CPI Tokyo (Jan, core) y/y 23.30 0.0%
JP CPI Nwide (Dec, core) y/y 23.30 +0.1%
JP Retail sales (Dec) y/y 23.50 +0.5%

Latest data Actual Consensus*
NZ RBNZ rate announcement 7.25% 7.25%
JP Trade balance (Dec, sa) Y611bn Y740bn
JP CSPI (Dec) y/y -0.4% -0.3%
* Consensus unless stated
3mth moving average

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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