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Tuesday June 13, 2006 - 10:35:26 GMT
Mellon Bank Foreign Exchange - https://fx.mellon.com/

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Global markets show further signs of strain – USD steady.
• US inflation fears remain paramount ahead of this week’s key data (US PPI today, US CPI tomorrow).
• Eurozone ZEW soft, UK CPI mixed.
• US retail sales report also features today.

Market Outlook

Yesterday afternoon’s US equity market sell-off has prompted a resurfacing of anxieties in global markets. Asian and European equity indices have weakened further overnight (Nikkei daily drop of 4.14% is the biggest since May 2004), while almost all emerging currencies are softer. Nervousness ahead of this week’s US data is the main factor, with PPI and retail sales due today and CPI tomorrow. The inflation data will be key as strong or weak showings will have a big influence on sentiment about Fed interest rate risk as well as global investor risk appetite in general.

As mentioned throughout the past month or so, such adversity in global markets, especially if it is caused by higher US rate fears, is USD supportive from several angles. First of all, a general rejigging of investor portfolios out of the trades seen over the past two years should see a net flow back into the USD investor base, as the trend during the past couple of years, at least in terms of equity markets, has been into non-US markets. Second, there is a basic risk appetite issue and a lowering of risk appetite can only negatively affect the positioning of short term accounts, which have recently been short USDs, although some of this has been reined in already after the price action of the past week. Third, is the basic argument about higher US interest rates, although this could have limited mileage. Rate rises because of inflation rather than growth factors are typically negative for a currency, as ultimately the growth outlook is endangered.

Today’s PPI and retail sales data will provide some inclination about where we go from here, although markets will most likely reserve judgement until tomorrow’s core CPI is seen. In the meantime, the USD is likely to retain support, even though medium-term vulnerabilities remain in place.

Data highlights in Europe today included a stronger than expected CPI number in the UK, with the rise in the y/y rate to +2.2% from +2.0% being solely driven by a sharp rise in household electricity and natural gas charges. The core y/y rate fell to +1.1% from +1.3%. Immediately after the release, GBP strengthened and rate expectations hardened but these moves were eventually taken back. In the Eurozone, German and Eurozone ZEW survey readings came out weaker than expected, although this is not exactly surprising given recent market anxieties about inflation, interest rates and global growth in general. The ZEW survey is after all a survey of market participants like analysts and institutional investors so it can move dramatically when market sentiment also shifts in this manner, as it has done over the past month.

Swedish CPI was slightly stronger than expected this morning, with the core y/y rate rising to +1.6% (highest seen since the +1.6% rate also seen in December 2003) from +1.5%. This is still well below the Riksbank’s 2% target, but the Riksbank recently clarified their policy to slightly move away from a pure focus on this particular measure of core CPI. They said they would monitor a number of measures of core inflation as well as asset prices in the pursuance of their overall inflation target. Thus far EUR-SEK has stayed below the area (9.26-9.27) it broke below at the end of May, although there is a slight risk of a reversal of this move in the short-term.

Day Ahead
US – April PPI is probably the main focus of the market in the current circumstances, but retail sales and business sales/inventories data will also be watched for readings about the general state of economic activity. A month or so ago a weak sales number would probably have been cause for mild relief in the equity market because of the dovish implications for Fed policy. One could still make this argument, although in the current circumstances weak data would also increase the nervousness in the market about the ability of the US economy to withstand further tightening, if the Fed feels obliged to tighten for other reasons i.e. inflation. As for core PPI, this has been fairly well behaved in recent months (+0.1% in Feb and Mar), in contrast to the strength seen on core consumer prices.

Diary
Data/event EDT Consensus*

US Chain store sls (w/e Jun 10) w/w 07.45 +0.1% last
US Retail sales (May) m/m 08.30 +0.1%
US Retail sales ex-autos (May) m/m 08.30 +0.5%
US PPI (May) m/m 08.30 +0.4%
US PPI core (May) m/m 08.30 +0.2%
US Redbook sls (w/e Jun 10) m/m 08.55 +1.9% last
US Business inventories (Apr) m/m 10.00 +0.6%
US Business sales (Apr) m/m 10.00 +0.8% last
US ABC consumer conf (w/e Jun 11) 17.00 -17 last
AU Consumer sentiment (Jun) 21.30 -6.0% last

Latest data Actual Consensus*
US Federal Budget (May) -$42.8bn -$36.6bn
NZ Retail trade (Apr) m/m -0.1% +0.5%
AU NAB business survey (May) +10 +12 last
JP Ind prod (Apr, final) m/m +1.4% +1.5%
ES CPI (May) y/y +4.0% +4.1%
SE CPI (May) y/y +1.6% +1.5%
SE CPI UND1X (May) y/y +1.6% +1.5%
GB CPI (May) y/y +2.2% +2.1%
GB CPI core (May) y/y +1.1% +1.2%
GB RPIX (May) y/y +2.9% +2.5%
GB RPI (May) y/y +3.0% +2.7%
EU ZEW expectations (Jun) 37.3 41.5
DE ZEW expectations (Jun) 37.8 45.0
* 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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