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Wednesday August 16, 2006 - 13:24:11 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• USD flat in European trading, after sliding post-PPI on Tuesday… US CPI tops the billing today…
• Industrial production and housing starts will also be of interest. Fed’s Fisher speaks later in the day.
• The Norwegian central bank is expected to hike rates.
• The MPC minutes showed a 6-1 decision to increase interest rates in August.

Market Outlook

The EUR-USD traded in a tight $1.2775 to $1.28 range throughout the Asia session and in early European trading, following the post-PPI USD sell-off on Tuesday. July PPI seems to have been dragged lower by discounting on passenger vehicles, something that should not have such an impact on CPI, while rising intermediate goods’ prices suggest that there may still be inflation pressures in the pipeline. While the market consensus is for a 0.4% rise in the headline CPI number, keep in mind that the softer PPI number may have biased the market to a lower number and an “as expected” reading could actually be a USD positive today. The “outside day” on the EUR-USD daily chart will have technicians excited but for choice, the $1.2800-30 area could prove sticky. A break there would threaten another foray towards the $1.29 key zone. The $1.2775-50 area offers support, ahead of Tuesday’s $1.27 low.

The minutes of the July meeting showed that the BoJ board members agreed, when they raised interest rates for the first time in six years, that future rate adjustments should be gradual and that the central bank should avoid the impression that it is in a rush to raise rates. The minutes showed that board members Miyako Suda, Atsushi Mizuno and Tadao Noda argued for a rise in rates to 0.5%, instead of the 0.4% seen, contending that a higher Lombard rate would help to restore functioning in the money market… There was little impact on USD-JPY, which is holding around 116.

Australia – the Q2 wage cost index rose a seasonally adjusted 1.1%, slightly better than expected, taking the y/y rise to 4.1%. Private sector wages rose slightly slower at 4% y/y, while public sector wages were up 4.4% y/y. In the recent statement on monetary policy the RBA said that a number of employers were resorting to non-wage incentives to attract workers. That could mean that the cost of labour is being understated. The labour market is very tight, with strong jobs growth recently and unemployment at a record low, which should keep the RBA wary and will do nothing to unsettle current expectations of a further RBA rate hike. Treasurer Costello was on the wires cheerleading, saying that Australia could afford wage rises if they are backed by productivity gains and that "Despite the fall in consumer sentiment in August, the fundamentals of the Australian economy are strong".

UK – The MPC minutes showed that the vote for a 25bp hike was 6-1, with David Blanchflower voting for no change because of concerns over the labour market. All of the MPC members were agreed that higher interest rates were needed to bring inflation on course to hit the 2% target two years out but Blanchflower had wanted to defer the move. The MPC noted that there were considerable uncertainties surrounding its forecasts in the short term, echoing the sentiments in the Quarterly Inflation report. The tone suggests that the move was precautionary. Most of the MPC thought a rate rise could easily be reversed if economic conditions warranted, while an early increase was seen as reducing the risk that a sharper move would be needed later. The GBP-USD eased lower in the wake of the minutes as the tone suggests that the MPC are probably not in a rush to hike again. Monday’s 1.8840 low remains support to watch, with intra-day resistance at the 1.8925-50 area, ahead of the 1.8975-1.90 zone.

The labour market data may persuade the BoE that they were right to hike, average earnings rose 4.3% in the 3 months to June, versus expectations of a 4.1% rise, which the ONS said was due to bonuses in the financial sector. The ex-bonuses number rose 3.9%, versus market consensus of a 3.8% increase, due to faster wage growth in the manufacturing sector. Manufacturing wages rose 5.9% in the three months to June, the highest since November 1992! Bear in mind that the BoE said in the Inflation report that they expect the expanding labour force to keep wage growth in check.

Day Ahead
Norway – the Norges Bank meets and is expected to hike rates by 25bp to 3%, despite the unexpected dip in July core CPI. The Norges Bank has in recent months been distancing itself from the current low readings on core inflation. On the basis of recent domestic data developments one could put forward a case for a faster pace of tightening from the Norges Bank, although with the global growth environment likely to be softening a little they are likely to stick to two 25bp hikes this year with may be one or two more in H1 2007. The recent pullback in the EUR-NOK cross to 8.05 should be short-lived, with NOK gains back through 8.00 towards 7.90 and lower favoured.

US – CPI will be key today. Core CPI is forecast to have nudged up 0.3% in July, taking the y/y increase to 2.8%, the highest since March 1996. The USD was hit on Tuesday after the softer PPI, but that appears to have been at least partially attributable to discounting on passenger vehicles. Cars (particularly second hand cars) are not accounted for in the same way in CPI and should not have the same impact on the number. The owners' equivalent rent category should continue to draw attention. Housing starts are expected to have eased further to 1810k, from 1850k in June. The market will be watching this as the slowdown in housing was cited by the Fed last as one of the reasons for keeping rates on hold at 5.25%. Industrial production and capacity utilisation are also due. Capacity utilisation may receive more attention than usual this week as the market continues to try and ascertain if there are inflationary pressures in the pipeline, with the market looking for a nudge higher to 82.6% in July, from 82.4% in June. Industrial production is forecast to have risen 0.5%, down from 0.8% in June. Later in the day, the Fed’s Fisher is due to give an update on the status of the economy and its implications on monetary policy.

Data/event EDT Consensus*

NO Norges Bank policy outcome 08.00 3.00%
US CPI (July) m/m 08.30 +0.4%
US CPI core (July) m/m 08.30 +0.3%
US Housing starts (July) 08.30 1810k
US Ind prod (July) m/m 09.15 +0.5%
US Capacity utilisation (July) 09.15 82.6%
US Fed’s Fisher spks 11.30

Latest data Actual Consensus*
AU Wage cost index (Q2) q/q +1.1 +1.0%
JP BoJ minutes (July 13-14 meeting)
SE Ind prod (June) m/m -0.5% 0.0%
GB MPC minutes (Aug 3-4 meeting)
GB Claimant count (July) 2k 5k
GB Average earnings (June) 3m y/y +4.3% +4.1%
GB Earnings ex-bonuses (June) 3m +3.9% +3.8%
* 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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