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Tuesday August 22, 2006 - 11:04:01 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD pushed lower by weaker ZEW survey.
• After yesterday’s inability to break higher, some modest downside now looks likely ahead of Thursday’s IFO.
• Tomorrow’s US home sales data will also carry some significance.
• Canadian CPI due today will be affected by sales tax cut.

Market Outlook

EUR-USD was not able to muster much followthrough interest to yesterday’s moves to the upside and it was pushed lower this morning by weaker than expected ZEW expectations numbers for Germany and the Eurozone. Both indicators fell to five-year lows, with the underperformance of the German number possibly related to the fears about the impact of the planned January VAT hike.

These balances have been falling for a number of months and reflect the anxieties building up in the investment community about whether recent growth can continue. However, thus far such a deterioration in the expectations of analysts and investors has not been matched in the expectations components of surveys of actual businesses like the IFO survey. Indeed, even in today’s survey the responses for current conditions continued to rise to five-year highs – see chart. Clearly, there is a lot of angst about whether the current impressive performance can continue and there is a risk that the strength of current performance could be negatively affecting expectations about the future. Respondents are asked whether they are optimistic or pessimistic about the economic situation in six months time and there is always a chance that such responses are made with reference to how things are presently, which are very good.

If the IFO were to show a similar degree of weakness it would be of more concern to the market and this is the significance of today’s number. It will make the market wary ahead of Thursday’s IFO outcome and this could see EUR-USD moving lower over the next couple of days, especially having failed on the upside yesterday. However, resilience in the IFO would see EUR-USD bouncing back. Fed speakers are also set for today but are unlikely to stray too far from the sentiments aired in the latest FOMC statement, which leaves Wednesday’s and Thursday’s existing and new home sales data as the next key US events. These will also carry significance for EUR-USD.

The JPY has remained soft, although 150.00 should hold EURJPY for now. Market concerns about very low Japanese rates remain in evidence ahead of Friday’s CPI release, where downward revisions are possible for key core y/y rates.

Day Ahead
Canada – July CPI will be affected by the July 1 cut in the Goods and Services Tax to 6% from 7%. Statscan release the data at 12.00, which will include the CPI excluding the eight most volatile items (CPIX-8). However, this is only one part of the story in terms of the Bank of Canada’s preferred overall measure of core inflation. The BoC uses CPIX-8 and then makes further adjustments for the impact of changes in indirect taxes before arriving at their final measure of core CPI (typically there is no difference between the two measures). Yesterday, the BoC stated that the impact of indirect tax changes will be to reduce the CPIX-8 y/y rate by 0.5%, so when Statscan release the CPIX-8 today, 0.5% needs to be added on to the y/y rate to get to the BoC’s true core measure. This latter number will be formally released by the BoC 90-minutes after the Statscan release. The market looks for +1.9% for the overall measure of core CPI, so this should mean +1.4% on the CPIX-8. It will take something highly unusual to have any major impact on BoC policy expectations or the CAD. 1.1140 is support on USD-CAD – resistance at 1.1275.

Data/event EDT Consensus*

CA CPI (Jul) y/y 07.00 +2.1%
CA CPIX-8 (Jul) y/y 07.00 +1.4%
US Chain store sls (w/e Aug 19) w/w 07.45 0.0% last
CA BoC core CPI (Jul) y/y 08.30 +1.9%
US Redbook sls (w/e Aug 19) m/m 08.55 +0.2% last
US Fed’s Guynn spks on econ 12.40
US Fed’s Moskow spks on econ 13.00
US ABC consumer conf (w/e Aug 20) 17.00 -15.0 last
JP Trade balance (Jul, sa) 19.50 ¥940bn

Latest data Actual Consensus*
JP All-industry index (Jun) m/m +0.1% +0.1%
CH Trade balance (Jul) CHF1.4bn CHF0.9bn
FR GDP (Q2, 2nd est) q/q +1.1% +1.2%
EU Current account (Jun) €4.0bn -€5.0bn
DE ZEW expectations (Aug) -5.6 11.4
EU ZEW expectations (Aug) 1.3 15.0
EU Manu orders (Jun) m/m -2.5% -0.6%
ZA GDP (Q2) saar +4.9% +4.3%
* 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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