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Thursday February 16, 2006 - 11:08:48 GMT
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Forex: Mellon FX Daily - European Edition

Key Points
• EUR-USD remains technically vulnerable – risk to 1.1775-1.1810 short-term. Bernanke does little to dampen US rate expectations.
• USD-JPY may be capped at 118.25-30.
• GBP respite from yesterday’s labour market data/MPC Report, but nervousness may persist ahead of next week’s MPC minutes.
• SEK recovery ahead of next week’s Riksbank repo announcement could be influenced by today’s CPI data.
• UK retail sales, NZ PMI, US jobless claims, Philly Fed index feature today – Japanese GDP & deflator due tonight.

Market Outlook

EUR-USD has held on to the lower ground achieved following Bernanke’s testimony yesterday. He didn’t really say anything new on policy, but crucially did little to offset current market suspicions about Fed rate hikes continuing beyond 4.75%. The inability of EUR-USD to sustain any bounces has been a noticeable characteristic of trading over the past three weeks and in combination with Monday’s move below key support around 1.1960 (retested briefly yesterday) suggests more downside risk in the short-term. 1.1810-1.1775 is the next support area. Bernanke repeats his testimony today and the market will be looking for more hints about personal bias in the Q&A session. Yesterday, he suggested in the Q&A that the current level of interest rates (right across the yield curve) was not historically high.

USD-JPY also bounced back yesterday, although as long as it remains below previous support (118.30) broken on Friday, some downside risk will remain in place. While the JPY (because of zero interest rates) is seemingly the most vulnerable currency to any resurrection of rate support for the USD, recent BoJ comments have complicated the issue somewhat by creating some short-term uncertainty on rates. Sure enough, the BoJ is not about to embark upon any significant interest rate hikes and what ever happens rates are likely to remain at very low levels. This should ensure that the JPY will ultimately continue to lose out on rate arguments. However, the market has become nervous about the announcement affects of a possible move in rates, especially after so many years of zero rates.

GBP gained some respite from yesterday’s stronger than expected labour market data and an MPC Inflation Report that failed to live up to its dovish billing. It seems unlikely that the labour market is suddenly going to pick-up after weakening in recent months, while the MPC Report did include some modest downward adjustments to CPI and GDP profiles. King also suggested that the risk to GDP was on the downside. However, there was nothing in the report to directly encourage speculation about a cut before the next Inflation Report in May. Still, this may yet change with next week’s MPC minutes. Reports in the weekend press, apparently based on ‘reliable information’, suggesting that the February vote was 5-4 will maintain market nervousness ahead of next week’s MPC minutes. If such a vote is confirmed the risk of a rate cut will come back very quickly. We would still see the risk to be on the downside for GBP in the next couple of months, on the basis that the Xmas recovery in sales eventually fizzles out. There will be more information on this issue today in the form of the official January retail sales release (see below).

Day Ahead
Sweden - CPI data is due today and a strong number would offer some support to the SEK, which has lost ground this week against the EUR. A recent problem for the SEK has been that a fair amount of Riksbank tightening was already discounted earlier in the year and it has so far been difficult for these arguments to move on any further. Recent criticism of Riksbank policy by politicians and unions has also not helped. However, the Riksbank has done little to discourage the market’s tightening expectations and a similarly positive message at next week’s repo announcement (where a 25bp rate hike is due) should help the SEK further. Overall, we would expect EURSEK to fall back once again and this should develop (at least for a time) ahead of next Thursday’s announcement. A strong CPI outcome would certainly help to galvanise support for such a move, although a close below Monday’s low at 9.2955 is required to shift the technical bias back to the downside.

UK – the debate on the short-term direction for UK monetary policy remains fluid and as a consequence the market will be sensitive to any unusual developments in the economic data. Today’s January retail sales release could therefore be significant. Given the tendency for sales to be volatile on a m/m basis during the Nov-Jan period the three months are typically looked at en masse for an indication of the underlying trend. The story so far is that November was +0.9% and December +0.4%, so the January outcome will be significant. The market is looking for a modest 0.2% fall today, although a much larger drop would seemingly dismantle much of the (admittedly guarded) optimism that built up about the consumer during the Xmas period. Conversely, a strong number would support sentiment about retail improvement and help to defer expectations of monetary easing. Watch out for back revisions.

New Zealand - PMI manufacturing data (due today) was weak last month (47.6 down from 52.3) but it is a volatile unadjusted data series, so it is not clear whether this was a one-off. Another weak number would add to concerns that the NZ cycle is on the turn.

US – the Philly Fed index is due today and this has underperformed its NY Fed counterpart in each of the past two months. Yesterday’s NY Fed index revealed another solid showing so the big question is whether the Philly Fed index can now bounce back. A consistent message from these two key Fed surveys would aid sentiment about the outlook for manufacturing and expectations for the next ISM survey. Weekly jobless claims data is also due today and there will be natural interest as to whether recent improvements have continued. There has been some suggestion that part of this is due to unseasonably mild weather, so as each week goes by with initial claims sticking below 300k confidence in the concept of an improving labour market is slowly growing.

Japan – the first estimate of Q1 GDP is due tonight and a strong outcome will help bolster expectations about a BoJ policy shift in the months ahead. However, keep an eye on the GDP deflator. There is some scepticism about how significant this is as a genuine indicator of inflation, but it will be interesting to see whether politicians use it as an argument against the BoJ. It will be a good gauge of the state of relations between the government and the BoJ and what opposition there currently is to BoJ policy changes. Many politicians have recently turned silent after being fairly vocal at the end of last year.

Diary
Data/event EDT Consensus*

SE CPI (Jan) y/y 08.30 +1.1%
SE CPI UND1X (Jan) y/y 08.30 +1.4%
SE Unemployment rate (Jan, nsa) 08.30 5.6%
GB Retail sales (Jan) m/m 09.30 -0.2%
NZ PMI (Jan) 12.00 47.6 last
US Initial claims (w/e Feb 11) 13.30 285k
US Continuing claims (w/e Feb 4) 13.30 2557k last
US Housing starts (Jan) 13.30 2020k
US Import prices (Jan, nsa) y/y 13.30 +7.9% last
US Imp prices ex-petrol (Jan, nsa) y/y 13.30 +2.4% last
CA Manu shipments (Dec) m/m 13.30 +1.0%
CA Net portfolio balance (Dec) 13.30 C$3.2bn last
US Bernanke repeats testimony 15.00
US Philly Fed index (Feb) 17.00 9.1
US Fed’s Poole on inflation targeting 18.00
AU RBA’s MacFarlane testifies 23.00
JP GDP (Q4, prel) q/q 23.50 +1.2%
JP GDP deflator (Q4) y/y 23.50 -1.5%

Latest data Actual Consensus*
US NAHB housing index (Feb) 57 57
NZ PPI input (Q4) q/q +1.2% +1.0%
NZ PPI output (Q4) q/q +0.3% +0.7%
GB RICS house prices (Jan) +9% +10%
ES CPI (Jan) y/y +4.2% +4.2%
* 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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