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Friday January 27, 2006 - 04:34:42 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD positioning scaled back amidst stronger US data.
• Uncertainty likely to remain in place in the shortterm.
• Equity markets turn around sharply.
• NZD temporarily wobbles on S&P comments, revealing underlying vulnerabilities.
• US GDP and new home sales feature today.

Market Outlook

The price action continues to bear down on existing positioning, with some EUR-USD longs giving up for the time being. The warning sign was perhaps provided by Wednesday’s price action, where EUR-USD failed to rally in spite of strong German and weak US data. The strong durable orders and weekly claims reports of yesterday have also helped matters, as has the sharp recovery in global equity markets over the past couple of days. The Nikkei was up a further 3.6% overnight, rubbing out all of the losses seen since the Livedoor scandal and closing at its highest level since September 2000.

This morning’s US GDP and new home sales data will be significant for how the USD develops today. It is important during this period of position adjustment that EUR-USD stays above the 1.2160-85 area – 1.2160 is the 200-day moving average, 1.2185 the previous range high – as this would trigger a slightly sharper pullback. These levels were being put under pressure late in the European morning.

The reason for the tentative trading seen so far this year is the overriding uncertainty about how the relative interest rate arguments are going to develop in the next month or so. This may remain in place until Bernanke’s semi-annual Monetary Policy testimony on February 15, although yesterday’s jobless claims data lends weight to the argument that the labour market may be picking up afresh and if further evidence of this surfaces in next week’s employment report case it would increase the risk of Fed tightening extending into Q2. Meanwhile, Eurozone data continues to suggest that ECB rates are too low – reports this morning showed ongoing strength in private sector lending and a further recovery in German consumer confidence.

Japanese core CPI spent another month above zero – the core measure recording +0.1% y/y – although it will take more than this for the BoJ to start changing their policy regime. The JPY has remained soft overnight following yesterday’s break in USD-JPY above 115.90-116.00 and there is a good chance of this extending to 117.50-118.00 as long as 115.90-116.00 can hold. The strong Nikkei has not really helped the JPY, which is not surprising perhaps as the two were not at all positively correlated during the second half of last year. In fact, equity gains were associated with increased hedging activity (JPY selling) as investors were forced to hedge higher stock valuations.

The NZD took a tumble overnight following a reminder from S&P about the risks emanating from the high current account deficit. It did stabilise somewhat after S&P made assurances that ratings were safe for now and this continued in the European morning. It is another sign of how these underlying vulnerabilities will continue to weigh on the NZD going forward. Overall downside risk remains in place but 0.6700 needs to break to get things moving. It should survive for now.

The Swiss KOF indicator came out much weaker than expected, helped by a downward revision to the previous reading from 1.36 to 1.17. The direction of the KOF is still upward but this came at a bad time for the CHF, with the recovery in global equity markets having already put it under some pressure this morning. The move in EUR-CHF through 1.5520 exposes the recent high at 1.5560, although given ongoing developments in the Middle East – Hamas victory, Iran etc – there should be some residual support for the CHF.

Day Ahead
US – Q4 GDP is likely to see a slowdown in growth compared to Q3 because of softer consumer spending and a bigger negative drag from net exports. If the market consensus of +2.8% is correct it would be the slowest growth since Q1 2003, but it is not exactly weak. New home sales will also be watched and it will be interesting to see if any weakness is greeted with the same relaxed approach to that adopted following the soft existing home sales data earlier in the week. New home sales were weak last month (November), but that was after the record highs seen in October.

Data/event EDT Consensus*

US GDP (Q4, 1st est) saar 08.30 +2.8%
US Core PCE price index (Q4) saar 08.30 +1.4% last
US New home sales (Dec) 10.00 1230k

Latest data Actual Consensus*
JP CPI Tokyo (Jan, core) y/y +0.1% 0.0%
JP CPI Nwide (Dec, core) y/y +0.1% +0.1%
JP Retail sales (Dec) y/y +1.2% +0.5%
DE Consumer confidence (Jan) 4.6 +3.8 last
IT Business confidence (Jan) 92.7 91.2
EU M3 (Dec) y/y +7.3% +7.5%
EU M3 (Dec) 3m y/y +7.6% +7.7%
EU Private sector lending (Dec) y/y +9.1% +9.0% last
GB BBA mortgage approvals (Dec) y/y +28% +51% last
CH KOF indicator (Jan) 1.22 1.43
* 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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