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Friday June 9, 2006 - 10:26:59 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Liquidation pressure in focus after EUR-USD breaks range support.
• Today’s US trade data will need to be very bad to offer any chance of a speedy EUR-USD revival.
• ECB leaves all options open after the experience of the past month.
• G8 meeting unlikely to offer anything new.
• Canadian employment and trade data also due.

Market Outlook

EUR-USD has remained very subdued overnight, displaying no real attempt to bounce back after yesterday’s losses. The market is now firmly focused on possible liquidation pressures after the break of key range support at 1.2685-1.2725 and short-term downside risk is now in place until this area is won back. The correction could extend back somewhere into the 1.2340-1.2500 area, although there is some initial support at 1.2600. 1.2600 is a previous high from Sept last year, 1.2500 is largely psychological and 1.2340 was the initial breakout point of the latest upmove. Even a bad US trade number today may not be sufficient to reverse recent USD developments.

G8 finance ministers meet today and tomorrow and there could have been some risk (in side comments) of them trying to distinguish between Asian currencies and others like the EUR in terms of the role they have to play in correcting global imbalances. However, during the week some of those due to attend have said that global imbalances will not be on the agenda. It therefore seems likely that any comments on the issue will be confined to “we stick with our message from April”.

The ECB was clearly in a non-committal mood yesterday. Having stepped back from deciding on a 50bp move, Trichet was fairly coy about what will happen in future. This is not surprising perhaps after their experiences of the past month. They clearly adopted a more aggressive tone after the May meeting, but while these may have been signals of a desire to up the pace of tightening (we think they were), they evidently felt unable to deliver on this yesterday, most probably because of developments in global markets. It follows that yesterday’s lack of signalling may mean one of two things or possibly both; 1) that they will leave rates unchanged until the August 31 (‘September’) meeting, 2) that they just do not feel in a position to offer any definitive signals given that other events can intervene to dictate their future behaviour, as seems to have been the case over the past month.

Trichet’s comments about the key indicators the ECB observes and the implications for policy direction were unequivocal – there are upside risks to price inflation because liquidity growth is very strong and policy remains accommodative and as long as there is continuing evidence of this they will continue to raise rates. However, there was a ‘no comment’ attitude as to how far this will go or how quickly it will happen. The ECB will basically play this by ear and all options remain open. If current market volatility continues then a pause until August 31 looks to be the most likely outcome. If markets stabilise and recover, then they may even move as soon as July, but it will be difficult for markets to regain their poise so quickly.

Day Ahead
Canada - trade and employment data are the main features and the market will be looking to see whether the recent softer trend in exports has continued. Exports may have registered a 1.2% m/m rise last month, but this came after declines in the previous two months of 4.4% and 4.3%, so the trend is clearly a weaker one at the current time and this was probably a factor in the BoC’s recent call for a pause in rates. Labour market data has been fairly steady.

US - the trade deficit narrowed last month to its lowest level ($62.0bn) since August last year and the market will be keen to see whether or not this has been sustained. If a sub-$65bn number is achieved this will be modestly encouraging, but signs of a definite downtrend will be required to really address poor trade fundamentals, which are so well established. Given the rise in energy prices in April compared to March the risk is for a higher deficit. Bernanke also speaks today, but it is not clear whether he will talk about any sensitive issues.

Data/event EDT Consensus*

G8 Finmin meeting (2 days)
CA Employment (May) 07.00 +20k
CA Unemployment rate (May) 07.00 6.4%
US Trade balance (Apr) 08.30 -$65bn
CA Trade balance (Apr) 08.30 C$5.4bn
CA Exports (Apr) m/m 08.30 +1.2% last
US Import prices (May, nsa) y/y 08.30 +5.9% last
US Imp prices ex-petrol (May, nsa) y/y 08.30 +0.8% last
US Fed’s Bernanke speaks 10.00

Latest data Actual Consensus*
GB NIESR GDP (3mths to May) q/q +0.6% +0.6% last
JP Machinery orders core (Apr) m/m +10.8% +3.1%
DE Trade balance (Apr) €11.2bn €12.3bn
DE Current account (Apr) €7.0bn €7.1bn
FR Ind prod (Apr) m/m -1.4% +0.2%
FR Manu output (Apr) m/m -0.7% +0.3%
SE Ind prod (Apr) m/m +1.6% +0.8%
NO CPI (May) y/y +2.3% +2.5%
NO CPIX (May) y/y +0.7% +0.8%
GB Global trade balance (Apr) -£5.8bn -£5.8bn
GB Non-EU trade balance (Apr) -£3.4bn -£2.8bn
DE Ind prod (Apr) m/m +1.6% +2.0%
* 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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