Friday July 14, 2006 - 10:23:09 GMT
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Mellon - FX Daily European EditionKey Points
‚ÄĘ JPY weaker as BoJ hikes rates 25bp, but signals
that very low rates to be maintained.
‚ÄĘ EUR-USD breaking below 1.2660-70.
‚ÄĘ AUD weaker on trade, USD strength and softer
‚ÄĘ US retail sales, import prices, Michigan sentiment
The BoJ obliged market expectations by deciding unanimously to lift the target for the call rate to 0.25% from zero. A 6-3 majority supported a move in the discount rate to 0.4% from 0.1%. The statement said that the economy continued to expand moderately, in line with the outlook for the economy and prices released on April 28 and that both economic expansion and a positive trend in consumer prices were set to continue. They noted that the stimulus from zero rates had recently been amplified by the improvements seen in economic activity (pickup in lending?) and inflation (lower real rates). In future, the BoJ said that rates would be adjusted gradually depending upon their assessments of economic activity and prices, adding that ‚Äúvery low interest rates will probably be maintained for some time‚ÄĚ. Overall, the announcement is fairly close to market expectations, but the main question now being asked is how far and how fast rates will rise in future and this remains unclear. The BoJ has tried to soothe any concerns about over-tightening by saying that future adjustments will be gradual and that ‚Äėvery low‚Äô rates will be in place for some time, but basically all options are open. As we have been noting over the past week or so, a key factor will be the revision to the CPI released on August 25 and what happens to the government‚Äôs preferred measure of core CPI that excludes food and energy and not just fresh food. There is a risk of the y/y rate moving into negative territory and this would heighten pressure from the government for rates to remain at very low levels. Another 0.25% hike before year-end is the most that can be expected at this stage. As far as the JPY is concerned there is nothing fresh from today‚Äôs announcement, but there is probably a sense of anticlimax in the fact that rates may not be moving that much in the near future. The JPY has been slightly softer both before and after the rate hike. The zero rate policy has formally been brought to a close, but for now the JPY is still top of the class when it comes to low-yielding currencies. On USD-JPY the move above 115.80 is potentially significant, although the 116.70 level (which could be approached today) is the main level on the topside. Whether or not this holds will be critical to JPY direction. EUR-JPY also looks set to test the recent high at 147.40 and this may be broken. EUR-USD also broke below the key 1.2660-70 area in early European trading and if this is not reversed quickly this morning a move back to 1.2500-50 should be seen as stale positions are liquidated. The AUD is also lower, hit by a much larger than expected Australian trade deficit as well as the break in EUR-USD. Weaker global markets are also not helping risk appetites and this may also be affecting AUD positioning. This could have further to run, but the AUD should eventually pullback given the prospect of an August 2 rate hike. Furthermore, the trade deficit is notoriously volatile.
US ‚Äď retail sales, import prices, Michigan sentiment and business inventories/sales are all released today and there will need to be some fairly dramatic developments to alter sentiment about Fed policy. Also, while the market has generally warmed to softer data because of the implications for a pause in Fed policy, if it is too weak it will add to nervousness about weaker growth/earnings in the equity market. Steady to slightly softer real sector data is the best outcome for equities. Retail sales and Michigan sentiment should be viewed with this in mind, although both are likely to show some resilience.
Import prices will attract attention given market nervousness about inflation. Import prices were strong last month, with the y/y rate rising to +8.3% from +5.8%, although excluding petroleum products the y/y rate only rose to +1.5% from +0.7%.
Data/event BST Consensus*
CA Manu shipments (May) m/m 13.30 +0.7%
US Retail sales (Jun) m/m 13.30 +0.4%
US Retail sales ex-autos (Jun) m/m 13.30 +0.4%
US Import prices (Jun, nsa) y/y 13.30 +8.3% last
US Imp prices ex-petrol (Jun, nsa) y/y 13.30 +1.5% last
US Michigan sentiment (Jul, prel) 14.45 85.5
US Business inventories (May) m/m 15.00 +0.4%
US Business sales (May) m/m 15.00 +0.6% last
Latest data Actual Consensus*
US Federal budget (Jun) $20.5bn $20.5bn
AU Trade balance (May) -A$2.3bn -A$1.1bn
JP BoJ policy outcome 0.25% 0.25%
* Consensus unless stated
¬©2006, 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.
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