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Thursday June 15, 2006 - 10:04:06 GMT
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Forex Market Update

US Core CPI shows signs of inflation - Triggers Broad-Based USD Selling

Despite the fact that markets are moving towards pricing in 5.50% FED Funds rate in August, we saw USD weaker after the higher than expected core CPI reading

• UK Claimant Counts (May) increased to +5,800 MoM vs. median +5,000
• UK Average Earning (April) increased to +4.4% vs. 4.5% exp
• UK ILO Unemployment (Feb-April) + 77,00, highest since Oct-Dec 05
• UK ILO Unemployment Rate (Feb-April) 5.3% highest since Jul-Sept 02
• EMU 1Q Employment rose 0.3% QoQ and 0.9% higher YoY
• EU French BoF revises French 2Q GDP forecast to 0.7% QoQ from previous forecast of 0.6%
• US CPI MoM (May) 0.4% vs. 0.4% exp.
• Core CPI Ex Food & Energy MoM (May) 0.3% vs. 0.2% exp.
• US Fed´s Beige Book – Slowing US economy
• UK RICS House Price Balance higher to 20% vs. 14%
• Japan Tertiary Industry Index MoM (April) 1.3% vs.1.0% exp
• BoJ Monetary Policy Announcement & Monthly Report – No rate hike
• Japan Leading Economic Index (April F) 54.4% vs. 54.5% exp.
• Japan Coincident Index (April F) 80.0% vs. 70.0% exp.
• China Yuan trades below psychological 8.0 yuan level
• Iran’s foreign minister Mottaki described a new EU offer to halt uranium enrichment as “step forward”.
• South African 2Q Business Confidence drops to 82 vs 86 in 1Q. Zar moves to 11-month lows

The New York session USD Crosses saw massive rebound off the day’s lows as the pressure from CPI uncertainty was released. In Asia the theme was consolidation with a mild strength in the JPY.
Yesterday all eyes where focused on the US Consumer Price Index. When the numbers printed, CPI was inline with general market expectation but Core CPI had ticked up slightly. CPI (May) MoM .04% and 4.2% YoY. Energy was the biggest contributor with a 2.5% increase in May and a whopping 23.6% YoY. Core CPI ex Food & Energy up .03% and 2.4% YoY. Gains were spread over sectors which with owner equivalent rent again adding significant pressure. These stronger numbers puts core CPI at 3.8% annual rate and 2.4% YoY, well above Bernanke target inflation area. These accelerated numbers will keep the Fed in a tightening stance. We will be watching for continued hawkish FED rhetoric.

These new readings increases the probability that the FED will further raise rates above the forecasted 5.25% levels to 5.50% either by a two additional hikes in June and AUGUST or a single, dramatic 50bp hike on June 29th (although with current information this would be the less likely scenario). That said with a 25bp rate hike completely priced into the market traders of FED futures focused on Sept. By lunch of the NY session traders had priced in a 40% chance for a 5.5% rate when the contract expires at the end of Aug.

• 6:45 FR Non-Farm Payrolls (Q1 F) 0.1% exp.
• 8:00 ECB Publishes Monthly Report (Jun)
• 8:30 UK Retail Sales MoM (May) 0.5% exp.
• 9:00 Euro-Zone CPI MoM (May) 0.3% exp.
• 12:30 US Empire Manufacturing (Jun) 11.0 exp.
• 13:15 US Industrial Production MoM (May) 0.2% exp
• 13:15 US Capacity Utilization (May) 82.0% exp
• 14:30 UK Leading Indicators Index (April) prior 0.6%
• 16:00 US Philadelphia Fed (June) 11.4 exp.
• 17:00 Fed Kroszner Speak in NY
• 18:00 Fed Bernanke Speaks on energy in Chicago

US beige book was released yesterday evening provided evidence for increasingly USD bearish outlook. As the market expected economic growth is slowing (as evidenced in recent data) and critical economic drivers, housing and consumer spending were softer. In addition, tightness in labor markets, increasing cost pressures that can no longer be absorbed but passed on to consumers promote inflation. Today USD traders must watch for any FED speak that will prove future rate direction.

Its hard enough to decipher Japan’s economic situation without the added complexity of internal political strife. Comments on monetary policy and ethic breaches from the BoJ and LDP politicians have just added to the lack of clarity. As predicated the BoJ’s two day monetary policy meeting did NOT culminate in the ending of its zero interest rate policy. We believe this critical decision is still far off in earliest august. The rational for this view is simply Japan's inability to accelerate growth, rapid decline of equity markets and justified fears of deflation combined with a lack of focus on policy over politics. JPY should see a rebound in weakness against the majors especially after BoJ Governors Fukui (a man in a fragile position) after meeting press conference and into Europe trading.

For only the second time since China’s National Foreign Exchange Center ended the 11-year-old USD peg, the Yuan official central parity rate was set below 8.0 to 7.9999 YUAN to the USD. This might signal greater flexibility for the official 0.3% pct trading band tolerated on either side of the central parity rate. In early Asia session, the news saw continued consolidation but USDJPY fell from highs around 115.50 to minor resistance at 114.50. However, its real positive effects will be seen in the longer term as the US moderates its protectionist rhetoric (a strategic move by China to preempt July’s G8 summit) and increasing China’s rabid demand for commodity.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar
EURUSD (1.2614 @ 06:35 GMT)
EURUSD provide the market with a near perfect whipsaw. Before yesterdays CPI the EURUSD tested the 1.2530 level (38.2 % retracement from 2006 highs) but lack the follow through to break this critical support. After CPI release and continued through Asia traders added to their long positions moving the pair to the two day highs below the 1.2600 levels. In the short term we should see continued EURUSD ranging between the 1.2530 – 1.2700 level. If that support breaks, we should be heading for 1.2400 which represents 50% retracement of the 1.1950 – 1.2980 rally. A move to the up side will have plenty of room to move. A pull back above 1.2700 is needed for the EUR bulls to regroup and focus higher again.

Trading stance: Look for buying opportunities above the break of 1.2650 for a move towards 1.24, stop kept below 1.2520


15 Jun 06
06:35 GMT

British Pound/US Dollar
GBPUSD (1.8454 @ 06:35 GMT)
GBP/USD had a volatile day similar to all the majors. After challenging 1.8320 levels (a significant 38.2% Fib lvl) the cable found strength and began a move to the 1.8500 resistance only to consolidate between the 1.8350 – 1.8420. Until the BoE or Feds signal which direction rates will go we should continue in this tight range. Traders should look to play the ranges.

Trading stance: Stay aside, as we need to see some direction from BoE.

15 Jun 06
06:35 GMT

US Dollar/Japanese Yen
USDJPY (114.97 @ 06:35 GMT)
USD/JPY was unable to hold yesterday’s highs around of 115.40 and slowly retraced during late NY and Asia session. As expected the BoJ press conference provided little clarity and no rate hike. Despite the temporary reprieve on JPY selling we see continued broad-based JPY weakness with a slight resistance at 115.50 and April 24th high of 115.98, while 113.00 is the key swing level to the downside.

Trading stance: Buy dips towards 115.00 with stops below 114.70 and target in the 115.90 area.


15 Jun 06
06:35 GMT

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