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Thursday February 23, 2006 - 11:51:58 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• USD-JPY move in response to Fukui highlights positional vulnerabilities as well as possible unease during forthcoming BoJ policy adjustment.
• German IFO stronger than expected again – boosting EUR.
• Riksbank’s slightly dovish statement hurts SEK. Further weakness is likely short-term, but it should be short-lived.

Market Outlook

USD-JPY fell sharply in Asia, with comments from BoJ governor Fukui triggering the move. He didn’t say anything particularly new but the comments were interpreted as the BoJ firming up its policy intentions for the short-term. He reiterated the BoJ view that they would end quantitative easing as soon as they were comfortable that core CPI had stabilised above zero and that such a conclusion was very near. He also said that interest rates would remain very low for a very long period and that at some point the BoJ would raise rates to a neutral level. This is old ground, but it is a sensitive issue for the market, especially with specs still very short of JPY. Indeed, the technical break below 118.25 on USD-JPY was also partly to blame for the position liquidation that followed.

Overall it seems clear that when the dust settles following the initial BoJ policy adjustment (i.e. dismantling the quantitative element of the current policy regime) the JPY will still be left with very low interest rates, but in the meantime the market will remain nervous of announcement effects related to the adjustment (as seen last night) and in terms of price action this could be aggravated given the amount of long USD-JPY positioning still in place. 119.00 is now the main resistance level, while support is at 116.75.

Also in Japan, activity indices were fairly solid, while the y/y rate for the corporate services price index (CSPI) was the least negative since 1998. On the trade data, a monthly deficit was recorded for January in unadjusted terms for the first time since the same month in 2001, although when adjusted for seasonal factors the surplus was only down slightly from Dec. Adjusted exports were down 0.9% m/m although this was very modest in comparison to recent strength – the 3m/3m rate is still at +5.1%.

EUR-USD jumped higher in response to another much strongerthan expected German IFO number. The headline IFO index rose to its highest level since October 1991, with the current
onditions component advancing with more strength than the expectations component. The data helps to reinforce expectations about an ECB rate hike next week and was a welcome development in this regard after the recent disappointing Q4 GDP number out of Germany. IFO strength will increase optimism about future GDP growth and as one can see from the chart, such IFO levels have historically been associated with y/y GDP growth of 3% or higher. Above 1.1974 is required today to suggest some extra short-term relief for EUR-USD.

The Riksbank raised rates by 25bp as expected but a dovish tone to their policy statement hurt the SEK. They said their inflation forecast was a touch lower than that offered in December and also that “The forecasts described in the Inflation Report indicate low inflationary pressure and that it might be possible to increase the repo rate at a slightly slower rate in future, compared with the interest rate path on which the forecasts are based. Market expectations of future interest rate increases have also been adjusted downwards somewhat over the past few days, which thus appears reasonable.” This is not the end of the world for the SEK, as further rate rises are in the works, but some solid data will now be needed to shore up these expectations. In the meantime, there is some room for upside testing on EUR-SEK and this could extend into the 9.43-9.50 area. However, it should prove to be short-lived as the data newsflow is likely to be generally positive.

Day Ahead
Eurozone – German state CPIs start to appear from today and there could be some extra focus on this data in the months ahead to see whether there is any pass through from the very strong PPI numbers seen recently.

US – weekly jobless claims are due out and once again there will be interest in whether recent improvements have been sustained.

Data/event EDT Consensus*

DE CPI states (Feb, prel) m/m from today +0.4%
SE Riksbank press conf 07.00
US Initial claims (w/e Feb 18) 08.30 295k
US Continuing claims (w/e Feb 11) 08.30 2511k last
US Help wanted index (Jan) 10.00 39
US Fed’s Santomero spks on econ 12.30
AU House prices (Q4) q/q 19.30 +0.8%

Latest data Actual Consensus*
JP Tertiary index (Dec) m/m +0.2% +0.3%
JP All-industry index (Dec) m/m +0.4% +0.5%
JP Trade balance (Jan, sa) Y572bn Y650bn
JP CSPI (Jan) y/y -0.1% -0.2%
AU AWOTE wages (Q4) q/q +0.4% +1.3% last
AU Private new capex (Q4) q/q +9.2% +3.5%
SE Riksbank repo & Inf Report +2.0% +2.0%
DE Consumer confidence (Mar) 4.8 4.6 last
DE IFO index (Feb) 103.3 101.5
DE IFO current (Feb) 101.9 100.5
DE IFO expectations (Feb) 104.8 103.0
GB Business investment (Q4) q/q -1.0% +0.3% last
IT Retail sales (Dec) y/y +0.2% +0.2%
* 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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