Monday May 22, 2006 - 10:38:41 GMT
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Mellon Bank Foreign Exchange - https://fx.mellon.com/
Forex: Mellon FX Daily -= U.S. EditionKey Points
â€¢ Global market volatility continues as commodities soften further.
â€¢ More USD strength possible in the short-term as past positioning is abandoned.
â€¢ Fridayâ€™s US core PCE price index will be significant.
More of the same it would seem this week, with global equity markets on the back foot and the USD generally firm. Asian equity markets have been suffering overnight and this pushed the USD up against regional currencies. USD-JPY
has also rallied further and is now trading just below the top of the current resistance area at 112.95. Above there would leave risk up to 113.50-114.20. However, European equity markets have recovered somewhat from the very steep losses experienced in early trading.
has been steadier, although it is important that it maintains a foothold above 1.2685-1.2700. Below there would raise big question marks over the validity of the recent move above the key technical area at 1.2730-75, leaving risk to 1.25- 1.26. Cable is also looking very shaky and there is every chance of more corrective action back to 1.8500.
Of course, this has little to do with any positives coming from US fundamentals
and everything to do with heightened investor risk and position adjustment.
In fact the irony is that much of the volatility is in part due to question marks over US fundamentals â€“ slowing growth, rising inflation? â€“ and the consequences for the global economy and markets. Somewhat perversely it is helping the USD in the first instance as previous bets â€“ long emerging markets, short USDs - are taken off the table. Also, some of the best fundamental stories out there are the ones that can now reverse the most, at least for a while, as previous inflows are taken back. The weakness in the Indian stock market this morning (down over 10% at one stage intraday) is a case in point.
The nature of the USD risk is highlighted in the IMM positioning data
released on Friday, which showed the positioning as of last Tuesday. EUR-USD spec net longs remained close to record highs.
The big question that nobody has any confidence in answering at the moment is how long and how far current corrective forces develop. It is not unusual at this time of the year to encounter corrective developments in markets, but on this occasion there are doubts over rising inflation, rising interest rates and a squeeze on global liquidity. On balance we would see current events passing without any major consequences for global growth (other than a mild slowdown) in the medium-term, but there can be little confidence in trading such a view at the present time. In terms of the flows into emerging markets that could be reversed in the short-term and the short USD positioning that could be unwound, it is a strong tide to swim against. It is perhaps far easier to go with it. Friday saw commodity markets
also starting to give up some serious ground and this has continued this morning, introducing a fresh element of volatility as far as emerging currencies and global markets in general are concerned.
All one can do is to identify certain events with the capacity to either stabilise or further damage confidence and one such release is Fridayâ€™s US core PCE price index.
If this is weak it will help to soften inflation fears â€“ if it is strong, more turbulence looks likely.
Data/event EDT Consensus*
EU ECBâ€™s Bini Smaghi speaks 10.45
US Fedâ€™s Fisher on globalisation 13.00
Latest data Actual Consensus*
EU Trade balance (Mar, sa) â‚¬2.5bn â‚¬2.5bn
* Consensus unless stated
ï›™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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