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Wednesday March 22, 2006 - 11:47:00 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD back on the defensive ahead of next Tuesday’s FOMC, but major slippage unlikely.
• NZD fragility remains – market also looking at ISK.
• UK Budget unlikely to affect GBP.
• NZ current account, Japanese trade data this evening.

Market Outlook

Apart from a brief rise following the publication of comments made by Bernanke in a letter to a US lawmaker, EUR-USD has remained subdued through the night. In a written response to a question from Democrat Brad Sherman, Bernanke said that “although trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the USD, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment.” There is a lack of alarm but there appears to be a basic premise that the current situation will lead to a weaker USD of some description. However, this is not contrary to current market opinion or the views expressed by his predecessor.

The pullback in EUR-USD yesterday was essentially a response to the lack of fresh dovish news coming from Bernanke’s (yield curve) speech and the stronger than expected core PPI. The EUR is likely to retain good support because of ongoing developments with regard to ECB rate expectations, but the aforementioned factors should ensure that the market remains a little wary ahead of next Tuesday’s FOMC statement. There is an outside chance of a further dip lower on EUR-USD, especially if there is any unexpected strength in the rest of this week’s US data (existing home sales tomorrow, durable orders, new home sales on Friday) but major slippage seems unlikely ahead of the FOMC. Weekly mortgage data due today will also be watched. 1.2000-30 is support beyond 1.2070, while main levels on top are 1.2120, 1.2170, 1.2210 and 1.2235.

USD-JPY has also recovered further after surviving Monday’s test of support around 115.50. A move above 117.40 is needed to get it back up into the upper half of the broader trading range.

EUR-GBP has also pulled back after recent gains, although today’s UK Budget is unlikely to reveal anything that should influence GBP. The MPC minutes (8-1) were fairly close to market expectations, but were slightly less dovish perhaps than the market had feared. “For some members, there were still downside risks to consumption, and the softer data since Christmas suggested that these might be crystallising. For others, there remained some upside risks to consumption resulting from the apparent strengthening of the housing market.” The one dissenter, Nickell is due to leave in May and Brown could announce his replacement (thought to be a non- UK economist) as soon as today. EUR-GBP should remain well supported at 0.6890-0.6900.

Fragility is still in place on the NZD and AUD, while the CAD has also been suffering. The Icelandic krona is also attracting some attention once again. In terms of overheating economies on the verge of retrenchment, investors will inevitably be drawing parallels between New Zealand and Iceland. On this basis there will be an element of contagion between the ISK and the NZD in case of any further weakness. However, from a fundamental perspective both the AUD and the CAD should ultimately be better supported. Near-term corrective risk remains but 0.7000-50 and 1.1775-1.1800 should offer support for the AUD and CAD respectively against the USD. On a fundamental basis there are greater areas for concern on the NZD and ISK.

Day Ahead
UK - Brown’s Budget is unlikely to reveal any major alterations to key fiscal variables. This is more a political event, given the likelihood of Brown taking over from Blair possibly ahead of the next Budget. He will not want to be too unpopular given his impending accession, but with public finances tight he has little room to provide any sweeteners. More likely is a lot of rhetoric about the UK economy and his plans for the future in equipping the UK to compete in a globalised market – mooted to involve setting up an advisory council comprising global business leaders. Also of interest will be how Brown fares against the new opposition Conservative leadership in the debate that follows. Whether he scores points or not in this contest could determine the domestic media headlines the next day.

New Zealand – Q4 current account data is out tonight and comes at a sensitive time for the NZD. Note that the current account deficit is not adjusted for seasonal factors so can be volatile. It is best to look at a rolling (cumulative sum) 12mth measure. In Q3 this widened to NZ$12.9bn from NZ$12.1bn in Q2.

Japan – trade data is out in Japan and while the overall surplus has been pegged back by the rising cost of energy and other commodity imports, exports have been faring very well.

Data/event EDT Consensus*

GB UK Budget announcement 07.30
BE Business confidence (Mar) 09.00 -2.0 last
NZ Current account (Q4) 17.45 -NZ$3.7bn
JP Trade balance (Feb, sa) 18.50 ¥673bn

Latest data Actual Consensus*
US ABC consumer conf (w/e Mar 19) -8 -8 last
IT Consumer confidence (Mar) 109.2 109.3
GB MPC minutes (Mar 8-9 meeting) 8-1 8-1
EU Trade balance (Jan, sa) -€2.5bn -€2.3bn
EU Manu orders (Jan) m/m -5.9% -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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