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Tuesday June 6, 2006 - 17:34:44 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Hawkish comments from Bernanke lifted the USD, while the ECB’s Trichet called for “permanent alertness” on inflation.
• BoJ’s Muto reiterated that interest rates in Japan will be low for some time…
• Fed’s Hoenig speaks this afternoon.
• Norges Bank Gjedrem speaks. Canadian building permits and PMI due today.

Market Outlook

The EUR-USD pulled back to 1.2885 in late Asian trading, after the rejection from the 1.2970-1.30 zone on Monday. Some surprisingly hawkish comments from Fed Chairman Bernanke at an event in Washington helped to boost the USD, though the EUR-USD managed to stage a small bounce in the early European session as traders digested the comments. For choice, upticks should be limited, with initial resistance noted at 1.2940 now and renewed pressure is likely on support at 1.2885-70. Losses through there would threaten a pullback to 1.28 zone.

Bernanke cited higher inflation due to persistent gains in commodity and energy prices, particularly in core CPI, as a risk to the inflation outlook and if sustained, “would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability”. “As a consequence, a sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation’s underlying productive capacity”. He acknowledged the slowdown in consumer spending, housing and payroll employment and emphasised that the US economy is entering “a period of transition”. Nonetheless, Fed fund futures took the comments to heart and the knee-jerk reaction was a shift to imply a 76% chance of a June rate hike, from less than 50% before the speech.

ECB President Trichet was speaking at the same conference and while he was speaking in the black-out period ahead of Thursday’s rate decision, he did venture a few hints. He said he believes inflation expectations on both sides of the Atlantic are still well-anchored, but that the current situation "calls for permanent alertness”, due to rising asset prices and “global imbalances”, reiterating that “our own goal is price stability - price being consumer price index stability. That's absolutely clear." For choice, the ECB still look likely to hike by 50bp on Thursday, with the relatively strong PMI services numbers out earlier today adding to the picture of more robust growth. However, the strength of the EUR-USD could be a mitigating factor and on this basis there is a chance of some council members deciding that such a move is too risky. If they do go with their natural monetary policy instincts and hike by 50bp, then Trichet is likely to talk down to the EUR again at the 2-day G8 meeting, which begins on Friday.

The EUR made headway on the cross rates on Monday, with EUR-GBP comfortably through 0.6875 now, though the 0.6900 zone is holding on the topside so far. There is potential to extend through there towards 0.6950 given that the BoE is expected to be on hold for some time. The EUR-JPY cross ventured above Y145 after the BoJ's Muto (at the same forum as Bernanke and Trichet) took the opportunity to reiterate that Japan may have low interest rates “for some time”). He also suggested that the FX market should stop looking for “large currency realignments”. Given the trend, there is little to stop a push towards the Y145.50 April 20 peak on this one, with Y144.50 likely to offer support on pullbacks.

The big stand-out was EUR-SEK, which plunged through the 9.21 January low on Monday, seeming to set off stops on the break. With little in the way of a fundamental catalyst, beyond last week’s comments from the central bank, this move is already bring unwound, with the rotation back above 9.21 likely to extend, especially, if the ECB does hike rates by 50bp as expected on Thursday. The 9.2650 low from April 20 is likely to be the next big test on the upside, ahead of the 9.30 zone.USD-SEK slipped to 7.0675 but did run into bottom-fishing there, ahead of the key 7 psychological level, with a turn back through 7.20 looking on the cards short term.

UK – the BRC retail survey showed a rise in sales of 3.6% in May y/y, boosted by pre-World Cup purchases, though pulling back from the four year high posted in April. The rise in April had been helped by the timing of Easter, a factor which resulted in a slight drag on the May number. However, the underlying trend remains healthy, with like-for-like sales in the three months to May up 2.7%, from 1.7% in April.

Norway – the EUR/NOK cross has stabilised this morning, with the NOK a touch softer after Q1 GDP mainland data came in softer than expected, at 0.6%, rather than the 0.9% consensus. That could temper expectations of a rate hike in June, though if Friday’s CPI comes out on the strong side, that would be a bigger factor.

Day Ahead
Norway – Norges Governor Svein Gjedrem speaks.

US – there is little economic data on Tuesday, aside from the usual weekly reports, but the Fed’s Hoenig is due to speak and it will be interesting to see if he echoes Bernanke’s relatively hawkish stance.

Canada – April building permits and the Ivey PMI report are due today.

Data/event EDT Consensus*

NO Norges Bank’s Gjedrem speaks 07.00
US Chain store sls (w/e Jun 3) w/w 07.45 -1.0% last
CA Building permits (Apr) m/m 08.30 -2.8%
US Redbook sls (w/e Jun 3) m/m 08.55 -3.0% last
CA PMI (May, nsa) 10.00 58.0
US Fed’s Hoenig on econ & policy 14.45
US ABC consumer conf (w/e Jun 4) 17.00 -17 last

Latest data Actual Consensus*
GB BRC retail survey (May) y/y +3.6% +6.8% last
AU Housing finance (Apr) m/m -0.5% +0.8%
AU Current account (Q1) -A$14bn -A$14.8bn
IT PMI services (May) 61.8 59.4
FR PMI services (May) 60.6 59.7
DE PMI services (May) 56.7 57.5
EU PMI services (May) 58.7 58.5
NO GDP – total (Q1) q/q +0.6% +0.8%
NO GDP – mainland (Q1) q/q +0.6% +0.9%
* 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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