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Tuesday June 20, 2006 - 10:40:31 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY buffeted by various Fukui comments.
• Liquidation risk still prevalent on EUR.
• US housing index reaches fresh eleven year low.
• Riksbank raises rates – message more hawkish than expected.
• Canadian CPI and US housing starts feature today. MoF business survey tonight.

Market Outlook

The JPY has been the main focal point through the night, having been knocked around by various comments from BoJ governor Fukui. Minutes of late April and early May BoJ meetings did not reveal any fresh thinking on policy risk going forward, although they did acknowledge that weakness in domestic and foreign equity prices needed monitoring. However, in a separate speech Fukui said that policy moves should be made early, that any changes should be made in small increments and that this should be carried out in a gradual manner. His reference to an ‘early’ policy adjustment was initially taken as a hawkish signal and an attempt to re-establish BoJ intentions despite the recent focus on his private investments. USD-JPY weakened on this news. However, later in the European morning he said that ‘early’ did not necessarily mean ‘acting earlier than market expectations’ and USD-JPY (already off the lows) recovered further.

Fukui also announced in the European morning that he would take a 30% salary cut for six months for causing so much trouble with his personal financial affairs, freeze all his equity investments and donate the principal and profit of the Murakami fund investment to charity. He is clearly trying hard to win back public support, which is crucial. The government has been keen to stick with him over the issue of his personal finances, but if he fails to win over public support his position could become untenable. With the BoJ on the verge of a period of interest rate rises it is paramount that the public has full confidence in the institution and its key personnel. USD-JPY needs to get below 114.45-55 to neutralise some of the recent upside risk. Resistance is at 115.50-80. Both areas should hold today. The EUR-JPY break below 144.75-80 (now resistance) was influential in driving the JPY upmove late in the Asian session - support is at 143.70-144.00.

EUR-USD has remained soft this morning and although the market is essentially waiting for next week’s FOMC meeting, downside (liquidation) risk remains in place in the short-term. This would be triggered by a break of 1.2500-30.

The Riksbank raised rates 25bp (in line with market expectations) but offered a more hawkish message than the market had expected, stating “it's possible there will be a need for slightly more rate increases over the coming year than recent market expectations have implied.” This helped to push EUR-SEK below 9.25 and if this can hold today a test of 9.19- 9.20 could be seen in the very short-term. However, this still does not seem to be an environment where the market will be that comfortable in chasing currencies like the SEK so we would remain a little wary for now.

UK mortgage lending was very strong at +£5.7bn, but with mortgage approvals already having tailed off over the past couple of months, lending may also follow lower in the months ahead. The MPC has been focusing on approvals in recent comments.

Yesterday’s US NAHB housing index (which is a combination of sentiment about current and future sales and prospective buyer interest) was reported down even further from the eleven year low recorded the previous month. The latest reading of 42 was the weakest since April 1995 and will add to perceptions at the Fed that housing will be a key factor determining consumer spending over the coming year. The prospect of growth moderation remains high and this fits in well with Fed expectations of an eventual normalisation of current inflation pressure. How much weight they put on that issue (in next week’s policy statement) compared to the most recent uptick in inflation is a key element of uncertainty for the market ahead of that meeting.

Day Ahead
Canada – CPI is due out but the core measure will have to be unusual to change perceptions about the steady BoC policy outlook. Core CPI has shown remarkable stability, having been either +1.6% or +1.7% y/y in each of the past nine months. This has provided the BoC with some room for manoeuvre when considering policy.

US – housing starts are due today after registering a 17-month low last month. M/m performance can be erratic in this data series, but the overall downtrend is set to remain intact in the months ahead.

Japan –the MoF manufacturing survey is due tonight and more often than not this is a useful guide to the likely direction of movement in the key Tankan balances, which are not released until July 3.

Data/event EDT Consensus*

CH SNB’s Roth speaks 06.30
CA CPI (May) y/y 07.00 +2.7%
CA CPIX (May) y/y 07.00 +1.7%
US Chain store sls (w/e Jun 17) w/w 07.45 +1.2% last
US Housing starts (May) 08.30 1850k
US Redbook sls (w/e Jun 17) m/m 08.55 +1.8% last
US ABC consumer conf (w/e Jun 18) 17.00 -15 last
JP MoF manu survey (Q2) 19.50 3.1 last
JP MoF all-industry survey (Q2) 19.50 6.1 last

Latest data Actual Consensus*
US NAHB housing index (Jun) 42 45
DE PPI (May) y/y +6.2% +6.4%
SE Riksbank repo outcome 2.25% 2.25%
GB BBA mortgage lending (May) +£5.7bn +£5.0bn last
GB PSNCR (May) £10.0bn £9.0bn
IT Ind orders (Apr) m/m +6.8% +0.6%
* 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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