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Friday April 21, 2006 - 10:45:04 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Riksbank changes reserve mix – boosting EUR at expense of USD.
• However, corrective risk may check EUR-USD advance today.
• AUD noise to continue, EUR-CHF higher.
• Canadian retail sales feature today.

Market Outlook

EUR-USD was boosted this morning by the Riksbank revealing a change in the allocation of their currency reserves, the most prominent of which was a rise in the EUR share from 37% to 50% and a reduction in the USD share to 20% from 37%. They said the purpose of the reallocation was to reduce the impact that currency fluctuations would have on their portfolio of reserves, the implication being that this is all to do with reducing volatility rather than anticipating direction. However, some will nevertheless see this as a further indication of CBs shying away from USDs.

The amounts involved are not that major. Actual total currency reserves currently stand at about $22bn and the changes in terms of cash are as follows - old amounts in brackets. All numbers are expressed in USD bns - EUR 11.0 (8.1), USD 4.4 (8.1), GBP 2.2 (2.4), NOK 2.2 (0.0), AUD 1.1 (0.7), CAD 1.1 (0.9) JPY 0.0 (1.8). All of the reallocation was conducted over the past four weeks according to the Riksbank, so is now complete. Other interesting points include the elimination of the JPY and the rise of the NOK.

The story could offer more support for the EUR today, although it is unlikely to be enough to push it through the week's highs. The main source of EUR-USD strength this week has been North American sessions and even this disappeared yesterday. There seems to be a lack of appetite to take the next step on EUR-USD and a strong close will be needed today (high 1.23s) to suggest otherwise. More likely is a test of the downside and this could briefly extend into the 1.2225-50 area. Overall, we still see overall risk to the upside on EUR-USD over the next few weeks, given the likelihood of a further firming up of expectations about 5% being at least a pause point for the funds rate. However, the market is likely to remain a little circumspect ahead of next Thursday’s economic testimony by Bernanke.

EUR-CHF has continued to advance this morning after yesterday’s break through the trendline (just above 1.5690) that had been dictating the down move from the peaks of early April. A report quoted Iran’s IAEA envoy as saying that Iran would continue to fully cooperate with the UN agency regarding questions about its nuclear program. However, there was no clear commitment about suspending enrichment activities, which the UN is demanding ahead of the April 28 deadline. EUR-CHF has room up to 1.5790 during this latest phase, but that should hold initially unless something more tangible by way of a concession comes out of Iran.

In Japan, there was a steeper than expected drop in the activity indices, although this should be put in the context of the rises seen last month Looking at 3-mth averages for these indicators (see chart) shows that the overall uptrend remains firmly intact.

The AUD is currently at the mercy of the sharp swings in the gold price and this could continue in the short-term. Note that gold also exhibited much volatility when breaking $500 in December – quickly touching $542 then retracing to $490 before making a more sustained push higher. Overall, we would expect the AUD to be well supported but there is potential for noise in the short-term. The RBA policy debate will also feature next week with CPI and private sector credit data due.

Day Ahead
Canada – retail sales data is due in Canada and this has been fairly solid in recent months. Indeed, sales ex-autos have been chugging along at a trend y/y growth rate of 6%-7% since the middle of 2004. This data can be volatile on a m/m basis and after the strength seen last month a softer number is generally expected today. However, it will take a few months of either weak or strong data to threaten the current trend. There is a similar picture on wholesale sales, also released today and equally erratic m/m. This will also carry some natural statistical risk to the downside after the strength of the advance seen last month. 1.1425 will be key for USD-CAD today – above there would suggest a mild pullback. Downside favoured overall.

Data/event EDT Consensus*

CA Retail sales (Feb) m/m 08.30 +0.3%
CA Retail sales ex-autos (Feb) m/m 08.30 +0.3%
CA Wholesale sales (Feb) m/m 08.30 0.0%

Latest data Actual Consensus*
JP Tertiary index (Feb) m/m -1.5% -1.1%
JP All-industry index (Feb) m/m -0.9% -1.0%
FR H’hold consumption (Mar) m/m -0.6% -1.1%
IT Retail sales (Feb) m/m +0.1% +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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