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Forex market Update

Published: Jul. 03 2006, 05:50 GMT

Increase in Tankan Survey raises probability for BoJ hike

Today’s Tankan survey sets the stage for a 25 bps hike in August and looks to send the JPY stronger in most major currency pairs.

MAJOR HEADLINES – PREVIOUS SESSION
• US Personal Income and Spending (May) 0.4%.
• US PCE Core (May) YoY 2.1%.
• US U. of Michigan Confidence (Jun) 84.9 vs. 82.5 exp.
• Japan Tanken Survey All Industry CapEx 11.6% vs. 9.0%.
• Japan Tanken Large Manufacturing Index 21 Outlook 22.
• Japan Tanken Non-Manufacturing 20 outlook 21.
• Australian AIG Performance of MGT Index (Jun) 54.5 up from a previous 48.9.
• Australian TD Securities Inflation (Jun) MoM 0.1% prior 0.3%, YoY 2.9% prior 3.2%.
• Australian Retail Sales (May) down -0.3% vs 0.2% expected.
• Australian Building Approvals (May) YoY -11.7%, MoM 3.3% vs. 1.0% expected – sees nice growth in MoM.

THEMES TO WATCH – UPCOMING SESSION
String of European PMI Surveys (Sweden, Italy, France, Germany, EU).
Reserve Bank of Australia Policy meeting – Decision will be announced tomorrow.

Russia removes currency restrictions for the Rouble.

JPY
This morning’s release of the influential Japanese Tankan Survey showed an overall increase of confidence as the diffusion index rose 1 point from 21 (this number is based on subtracting the pessimists from the optimist in a 10,000 business survey).

A critical area which the BoJ has been closely watching showed healthy gains was business spending which surged to 11.6% (all industry Capex vs. 9.0% exp.) and capital spending of larger manufacturers rose 16.4% (outlook 22 vs. 20 exp.) and non-manufacturers up 8.9% (outlook 21 vs. 18 exp). These numbers demonstrate that businesses are confident about future prospects and confident that the 2002 economic recovery will continue.

This strong Tankan Survey increase the probability that the BoJ will end their longstanding zero interest rate policy at the July 13-14th meeting. In a recent interview with BoJ Policy board member and hawkish advocate of the group Mizuno state that companies were becoming aggressive with spending and the economy and prices are rising to fast. Based on these and similar statement he has made in the past combined with the Tankan Survey we see his continued aggressive support for a rate hike. While the public still remains critical of BoJ Governor Fukui we doubt he will resign or hint resignation before the next policy board meeting. Therefore the board should the votes needed to raise the overnight call rate 0.25%. We see the JPY gaining considerable strength primarily against the USD in the buildup before the July meeting.

USD
Now that the FED is in a neutral pattern Investors will be watching got see if there is building pressure for an additional rate increase in August. Most economists understand that a tightening cycle will take time to filter through the economy so constant hiking might become overkill before the economic indicators can sense a change. This is why Bernanke is looking to pause for the first time after 17 consecutive hikes. The US data released on Friday might provide support for their neutral bias. The core PCE, which is closely monitored by the FED, came in as expected rising 0.2% in May. The U. of Michigan Consumer Sentiment Index rebounded to 84.9 June after a steep decline to 79.1 in May. While it yet to see if these numbers can last they are both benign enough to allow the FED some breathing room.


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 (1.2780 @ 05:16 GMT)
02-07-200 Weekly Update: EURUSD took out major resistance late in the week and the break of 1.2695 gives reason the believe that 1.2480 is the low for now. Daily stochastics has turned higher and we expect a test of 1.2980 in the weeks to come the long term inverse head and shoulders target. A close above would give scope for 1.3300 target the top of the bull channel from March 06.

Monday: Very quiet Asian session, but we expect more upside in to come trough the European session. Look to buy on dips towards 1.2710-40 with stop below 1.2665 for a 1.2850 target.

Resist.
1.3024
1.2886
1.2838
1.2780
1.2700
1.2609
1.2471
Support

Quoted:
03 Jul 06
05:16 GMT


British Pound/US Dollar
GBPUSD (1.8450 @ 05:16 GMT)
02-07-2006 Weekly Update: GBPUSD made a strong upside reversal last week as daily stochastic has remained in oversold territory since mid-June 06. 1.8565 is the medium term trend reversal level and would give scope for a retest of 1.9025 the highs from early May 06. 1.8130 50% retacement (from 1.7230-1.9025) remains key for the longer term bullish trend to remain intact.

Monday: GBPUSD trading marginally lower in Asia, but we favor the bullish bias through the European session. Buy in the 1.8370-90 area stop below 1.8320 target 1.8600.

Resist.
1.8888
1.8651
1.8566
1.8450
1.8328
1.8177
1.7940
Support

Quoted:
03 Jul 06
05:16 GMT


US Dollar/Japanese Yen
USDJPY (114.49 @ 05:16 GMT)
02-07-2006 Weekly Update: USDJPY made a sharp reversal last week as the pair was unable to close above the top of the G7 gap at 116.70. Only a close above this level would suggest further upside, but expect the long term bear trend line from 98 presently at 119.40 to cap any upside move. A close below 114.40 wave support this week would confirm a medium reversal for a for a test of the 108.75-109.20 support area from May 06. Look for intra week support at 113.35 and again at 112.82 50 % retracement (from 116.79-112.82).

Monday: Not much action despite the better then expected Tankan survey, but it puts pressure in the week to come and supports a rate hike in August. Look to sell on rallies with a stop above 115.20 for a 113.30 target.

Resist.
116.76
115.69
115.06
114.49
113.98
113.54
112.46
Support

Quoted:
03 Jul 06
05:16 GMT

Risk warning
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.

Please read our full Analysis Disclosure & Disclaimer at www.saxobank.com/analysis/disclaimer.

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