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Tuesday January 31, 2006 - 11:54:50 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD stabilises ahead of FOMC announcement, although the latter is unlikely to shed any real light on current policy uncertainties. This week’s US data could be more important.
• USD-JPY pulls back after recent gains – Japanese data also better.
• USD-CAD holding impressively below 1.1500.
• UK data mixed to good.
• US employment cost index, Chicago PMI & FOMC outcome feature today.

Market Outlook

EUR-USD has failed to show much appetite for a bounce since Friday’s sell-off, suggesting that buyers may be a spent force for the time being and that position liquidation remains dominant. One would expect EUR-USD to drift up a little ahead of today’s FOMC announcement after the downmove seen since Friday and the fact that the market will be a touch uneasy about the FOMC sounding a little dovish (see below for preview). Above 1.2115-20 could trigger something, but the positional backdrop may contain and even prevent such a development. What is for sure is that EUR-USD has merely fallen back into the previous range after Friday’s move and overall direction is likely to remain difficult unless there is some clear tone to this week’s ISM and employment data. Support is at 1.1972 (100-day moving average) and 1.2000 – resistance at 1.2150-85.

Japanese economic data was fairly encouraging, with the jobless rate falling and the jobs-to-applicants ratio (an indication of labour demand) rising to its highest level since September
1992. Household spending was also stronger than expected and this may have helped the JPY a little, although the link between such developments and the prospects for rate hikes looks like remaining weak for the time being. A more vigorous pick-up in core CPI is required for this to happen. A more plausible explanation for USD-JPY weakness is that it is merely retracing part of the sizeable move seen since the break above 115.90-116.00 – support now being at 116.75.

In the Eurozone, German unemployment gave back some (+69k) of the large fall (-110k) of December and such volatility makes it difficult to form conclusions about the underlying trend. The employment data, for example, has been far less impressive, so some advances will be required in this series perhaps before the market starts to sense a true labour market recovery. Eurozone business sentiment indicators and surveys were mixed, but not inconsistent with the improvements in Eurozone activity seen in recent months.

UK data was mixed but generally solid. Strong mortgage approvals and house prices confirm the improvements in the housing market, while the weakness in CBI retail sales was not a major surprise after the big bounce back in December. Consumer credit remained soft, while consumer confidence bounced back a little. In sum, there will remain some apprehension about how the consumer will perform going forward, but some of the improvement over Xmas appears to have been sustained. The expectations balance of +1 in the CBI survey was the best since May. The ongoing recovery in the housing market also argues against any short-term cut in interest rates. GBP continues to look better against the EUR, but 0.6810 needs to break to open things up on EUR-GBP. This may also depend upon the nature of the ECB outcome on Thursday.

Day Ahead
Canada – monthly GDP is out today and the market doesn’t always respond too much to this data. However, the CAD is worth keeping an eye on as USD-CAD is currently sitting quite nicely above the key support level around 1.1425. It fell back below 1.1500 on Friday and seems to be holding the move fairly well, in contrast to the other occasions in Dec and Jan when such territory has been explored, where it bounced back quickly and sharply. There is a good chance of a further move lower in the short-term, although this is likely to fade ahead of the 1991 low at 1.1190. Back above 1.1500-25 would suggest the attempt has failed and this would be further confirmed above 1.1600.

US – the quarterly will be watched for labour cost pressures, but this series has been very well behaved through the course of 2005, especially the wages and salaries component. Chicago PMI is also out and while this has some potential for volatility, it has held above 60 in five of the past six months (51.9 being the outlier in August). The main focus will of course be the FOMC announcement. A 25bp rate hike seems like a done deal and the statement is unlikely to fundamentally resolve the current uncertainties about how far the funds rate will be raised. The latter is unlikely to offer clear guidance about what will happen at the next meeting on March 28, as the existing FOMC will not want to be seen to be forcing new-chairman Bernanke’s hand. A message about future rate decisions being dependent upon the data seems most likely, coupled perhaps with some kind of acknowledgement about the risk of further tightening. Bernanke’s policy testimony on February 15 will then be keenly awaited.

Data/event EDT Consensus*

Oil OPEC meeting
US Chain store sls (w/e Jan 28) w/w 07.45 +0.3% last
CA GDP (Nov) m/m 08.30 +0.2%
US Employment cost index (Q4) q/q 08.30 +0.9%
US Redbook sls (w/e Jan 28) m/m 10.55 -0.4% last
US Consumer confidence (Jan) 10.00 105.0
US Chicago PMI (Jan) 10.00 59.9
US FOMC meeting outcome 14.15 4.50%
NZ Trade balance (Dec) 16.45 -NZ$0.8bn
US ABC consumer conf (w/e Jan 29) 17.00 -9 last
* Consensus unless stated

Latest data Actual Consensus*
FR Unemployment rate (Dec) 9.5% 9.6%
FR ILO job seekers (Dec) m/m -23k -20k
JP Unemployment rate (Dec) 4.4% 4.5%
JP Job-to-applicants ratio (Dec) 1.00 1.00
JP Employment (Dec) +30k -550k last
JP PCE workers (Dec) y/y +3.2% +2.5%
AU Private sector credit (Dec) m/m +1.2% +1.0%
JP Housing starts (Dec) y/y -0.9% +7.2%
JP Small business confidence (Jan) 49.6 50.1 last
GB N’wide house prices (Jan) m/m +1.4% +0.5%
DE Retail sales (Dec) m/m -1.4% +0.8%
DE Employment (Dec) -13k +16k last
FR Household survey (Jan) -27 -29
DE Unemployment (Jan) +69k -20k
GB Consumer credit (Dec) +£0.8bn +£1.1bn
GB Mortgage approvals (Dec, sa) 122k 115k
EU Econ sentiment (Jan) 101.8 101.0
EU Business climate index (Jan) 0.34 0.41
GB Consumer confidence (Jan) -3 -7
GB CBI retail trades survey (Jan) 0.0 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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