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Wednesday May 3, 2006 - 10:23:11 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• USD sentiment still negative but EUR-USD remains below recent highs - 1.2730-75 area is key.
• GBP gives up some recent out performance.
• RBA raises rates - market awaits more guidance on future policy.
• US non-manufacturing ISM features today – Bernanke also speaks.

Market Outlook

The USD has remained soft overnight and the lack of a recovery suggests that the market is reluctant to give up on its recent attack just yet. The RBA rate rise (see below) also perhaps helped to reinforce the idea that non-US rates are on the rise. However, despite the USD weakness seen early in the European session, the recent high on EUR-USD at 1.2690 has been left intact. This remains the first level of importance on the upside, although the area running from 1.2730-75 will be key in determining whether the move extends significantly. It is not clear that current momentum will be sufficient to take this out. Support is at 1.2500-50.

The RBA raised rates by 25bp to 5.75% citing the stimulus from the global economy and commodity prices, strong domestic credit growth and underlying CPI growth higher than they expected at this stage of 2006. There was no indication about what may happen to policy in future and this could be taken either way. Clearly, there is no suggestion that this is the beginning of a series of moves, but equally there are no assurances that this is a one-off. Friday’s RBA Quarterly Policy Statement will be watched for any further indications on this topic, but overall the market will be most likely be left with the conclusion that all will depend upon the data.

At this stage the money market seems pretty sanguine about rate hike prospects, with Aussie bill futures only looking for one more hike this year. If global economic conditions continue to develop along recent lines and credit growth repeats the performance of recent months, a further hike would seem likely in Q3. The AUD had eased back to 0.7605 just ahead of the announcement but jumped on the news and has some scope up to 0.7750 in the short-term. However, this should hold unless there is further encouragement to rate hike expectations from Friday’s RBA statement or more generalised USD weakness. Below 0.7600 would suggest some corrective activity.

The CAD remains well supported after last week’s break below 1.1190 (1991 low) and yesterday’s looser than expected Budget proposal. 1.10 needs to break on USD-CAD to keep this going – key resistance at 1.1190-1.1200. General USD performance as well as this week’s Canadian data (employment on Friday) will be key.

Recent data releases out of the UK have served to shift the balance in the market to expecting rate hikes, sending EURGBP lower, but it has bounced back a little this morning. Yesterday’s stronger PMI data certainly offers support to the view that the CBI manufacturing survey rather than the official manufacturing output data is a better guide to what has been going on in the sector. It is also more consistent with what has been happening in the UK’s trading partners. The CBI retail survey was also stronger but as the main balance is basically a y/y measure, a note of caution is needed given the alternate timing of Easter this year. The CBI said that Easter falling in April boosted sales this year. The World Cup should also help
to support sales, but given the debt background for many consumers a more aggressive upturn seems unlikely and this in itself means a rate hike is not assured. In the short-term EURGBP could travel to 0.6800 but further developments will depend upon further strength in the data – also not assured.

Day Ahead
US – non-manufacturing ISM is the main data feature, although factory orders is also out and the latter can include revisions to the recently released durable orders data. On the basis of other data seen of late, fairly strong showings look likely on today’s indicators. Bernanke is due to speak on how to revitalize communities, so if he sticks to the script he is unlikely to say anything on the subject of Fed monetary policy. There is always a chance of him trying to clarify his recent comments, including those reported on CNBC, but if he does he is unlikely to go into much detail.

Data/event EDT Consensus*

JP Market Holiday
NO Norges Bank’s Gjedrem speaks 07.30
US Fed’s Moskow speaks 08.30
US Factory orders (Mar) m/m 10.00 +3.7%
US ISM non-manu (Apr) 10.00 59.5
US Fed’s Bernanke speaks on community development 11.30

Latest data Actual Consensus*
US ABC consumer conf (w/e Apr 30) -13 -11 last
AU RBA rate announcement 5.75% 5.5%
EU Unemployment rate (Mar) 8.1% 8.2%
EU PPI (Mar) y/y +5.1% +5.1%
* 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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