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Tuesday April 25, 2006 - 10:39:10 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition:

Key Points
• USD-JPY steadier in Asia/Europe but still soft.
• Positional pressure is capping EUR-USD – fresh impetus is needed to generate more gains. German IFO stronger than expected.
• US data & Bernanke will be key this week – existing home sales & consumer confidence due today.
• Riksbank reserve speech, BoC policy announcement, Australian CPI also feature.

Market Outlook

USD-JPY remains soft but the fact that Asian and European sessions have passed without recording fresh lows is cause for some guarded optimism perhaps. However, 114.80-115.00 will need to be cleared today to suggest any kind of recovery. The main damage from yesterday was the ease with which it moved and stayed below prior support in the 115.45-50 area, while the 200-day MA was also at 115.52 – all of this is now the key barrier to a larger bounce. 114.24 was the low yesterday, just ahead of the 114.15 low from January 23 and it is this area that will be support today. However, the main support area runs from 113.75 down to 113.43 (the latter being the spike low recorded on January 12), which is also the 6-mth low. We remain sceptical about whether main supports will break, unless there are some truly positive developments in this week’s Japanese economic data.

EUR-USD has been largely watching developments from the sidelines, with EUR-JPY running into its own problems. EURUSD has generally shied away from any move above 1.24, doing so again this morning following a stronger than expected IFO survey, which supported perceptions about the improving economic scenario in Germany. German state CPIs were also stronger than expected. A reason for the lack of EUR-USD upside is the positional backdrop, with last week’s IMM spec positioning data showing EUR net longs at their second highest ever level. Indeed, there is still a fair amount of JPY short positioning and together this suggests that positional constraints are most apparent on EUR-JPY, even though the logic for recent JPY movement (i.e. global imbalances) is more of a USD-JPY issue. This does not necessarily preclude further EUR-USD strength (which we still favour overall), merely that it will probably need fresh impetus to sustain further upmoves in the short-term and this is where the tone of this week’s US data releases and Thursday’s Bernanke speech will be significant. Existing home sales and consumer confidence are due today (see below).

The Riksbank’s Srejber is due to speak today on “How the Riksbank's financial assets are managed" and this may shed some further light on the recent rejig of Riksbank reserves. Last week the Riksbank was keen to put forward the idea that the move was motivated by a desire to reduce the ‘volatility’ of its reserves when valued in SEK, as opposed to an opinion about whether certain currencies will appreciate or depreciate. A similar message seems likely today, although the market will still view it as further evidence of a move away from the USD.

Day Ahead
Canada – the BoC release their latest policy announcement and a 25bp rate hike is generally expected. The main focus will be on the guidance provided about future actions. Last month they downgraded their tightening bias to “some modest further increase in the policy interest rate may be required” from the January comment that “some modest further increase in the policy interest rate would be required”. At this stage they may decide to retain the modest tightening bias, although a further hike in May is not assured. Economic activity remains solid, but the steady core CPI y/y rate gives them some headroom for a more relaxed approach to policy, while the back-to-back falls in exports over the past couple of months (-3.5% and -3.8%) raises one potential question about future growth. The market may need the carrot of another rate rise to prompt them into taking on the year’s USD-CAD low at 1.1300 - at least in the short-term. USD weakness in general in the weeks ahead may yet be enough to push USD-CAD below this level. Market positioning in the CAD’s favour is currently quite modest, so there is no constraint from that quarter.

US – existing home sales and consumer confidence feature in the US. Last month saw a sharp rebound in existing home sales, although this was more a correction to the weakness of the prior month rather than an indication of the underlying trend. Other key indicators such as mortgage applications, pending home sales and the NAHB index have all been generally soft, consistent with weakening home sales. Consumer confidence will also be watched closely to see whether the recent rise in fuel prices has had any negative impact on sentiment. The Conference Board measure has been reasonably solid over the past two months.

Australia – CPI data is due tonight and will be significant in determining whether the recent hardening in RBA rate expectations can be sustained or extended further. A number of data releases have been showing strength in recent months, but if CPI were to remain soft then the urgency to raise rates would be reduced. In contrast, if there is any surprising strength in CPI the case could be made for a rate rise as soon as next week. There is a whole gamut of inflation measures spawned by the CPI release – total CPI, total CPI ex-volatile items, market (private sector) prices ex-volatile items and the RBA’s trimmed-mean seasonally adjusted annualised rate measure. Key levels to look out for on these measures include 2% on market prices ex-volatile items, 2.5% on the RBA measure and 3% on total CPI. These levels will need to be exceeded at least for it to be considered an uncomfortably strong number.

Data/event EDT Consensus*

SE Riksbank’s Srejber on reserve management 07.00
US Chain store sls (w/e Apr 22) w/w 07.45 +1.1% last
NZ Business confidence (Apr) 08.00 -51% last
US Redbook sls (w/e Apr 22) m/m 08.55 +4.1% last
CA BoC policy announcement 09.00 4.0%
US Consumer confidence (Apr) 10.00 106.2
US Existing home sales (Mar) 10.00 6.70m
EU ECB’s Papademos speaks 10.00
EU ECB’s Gonzalez-Paramo on global imbalances 12.30
US ABC consumer conf (w/e Apr 23) 17.00 -7 last
AU CPI (Q1) q/q 21.30 +0.8%
AU CPI (Q1) y/y 21.30 +2.9%
AU CPI mkt prices ex-volatile (Q1) y/y 21.30 +1.9%
AU CPI-RBA trimmed-mean (Q1) y/y 21.30 +2.4%

Latest data Actual Consensus*
JP CSPI (Mar) y/y -0.2% 0.0%
DE Import prices (Mar) y/y +5.5% +5.7%
SE Trade balance (Mar) SEK17.5bn SEK13.0bn
DE IFO index (Apr) 105.9 104.8
DE IFO current (Apr) 106.4 105.0
DE IFO expectations (Apr) 105.5 104.9
EU Current account (Feb) -€5.6bn -€0.7bnR last
ZA CPI (Mar) y/y +3.4% +3.4%
ZA CPIX (Mar) y/y +3.8% +3.9%
GB CBI business optimism (Q1) -2 -14 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


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