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Tuesday September 19, 2006 - 11:12:19 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY up after European comments.
• ZEW weakness looks highly unusual.
• SEK upside favoured.
• Canadian CPI, US PPI and housing starts feature today.

Market Outlook

The JPY responded poorly yesterday to the comments from European and Japanese officials at the weekend but it has exhibited a dramatic turn of fortune this morning. It initially weakened further in Asia, with 150.26 being touched on EURJPY following comments by Japanese finmin Tanigaki. He said that EUR-JPY had not been specifically discussed at the weekend and refused to comment on specific FX levels. This appeared to raise some doubt over the strength of any agreement made between Japan and the Eurozone. However, in European hours chief cabinet secretary and PM candidate Abe said that currencies should be stable and reflect fundamentals. This was followed quite quickly by comments from an unnamed European official, who said that it may take some time for the markets to digest the message for the weekend, which he added was quite clear.

Even before these comments both EUR-JPY and USD-JPY were struggling to hold on to higher levels and both tumbled sharply after the comment from the European official. Key now will be how the US market responds to this price action, although for now it would appear that positional considerations are winning out over the negative rate backdrop for the JPY. More volatility looks likely over the next couple of days. Of significance for EUR-JPY will be the 148.20 level ahead of the September 8 low at 147.56. Below 147.56 would signal trouble. The USD-JPY move was a basic rejection of yesterday’s break above 118.00 and represents a confidence blow to those looking for short-term upside.

EUR weakness was compounded by the much softer than expected ZEW survey, which fell to its third lowest level in over thirteen years. The late 1998 emerging markets crisis was the only time the German ZEW expectations balance has been lower during the last thirteen years and one is left wondering whether this particular measure is a reliable gauge of future economic prospects. The ZEW survey was also weak last month, but the IFO survey of actual businesses (rather than the analysts and investors covered by ZEW) showed resilience. Last month we also made the point about whether the weakness of ZEW expectations component was inadvertently related to the strength in current conditions (which were once again very strong in today’s survey). 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.

EUR-USD has reversed the gains seen yesterday and as noted yesterday, key levels need to break before the bias shifts back to the upside. 1.2740-50 is important in this regard, as is the 100-day moving average (at 1.2738) on a closing basis. Support is at 1.2630.

The SEK has been firmer this morning with the centre-right’s election victory at the weekend still supporting sentiment. 9.13- 9.16 is the support area that needs to be breached on EURSEK and while this could provide some initial protection, downside is favoured in the medium-term. In combination with the favourable monetary policy background, the change in government is without doubt a long-term positive for the SEK. This relates to the impact that could be seen on potential growth via structural reforms as well as the capital inflows that could be triggered via M&A and state asset sales (latter is already earmarked at SEK150bn).

Day Ahead
Canada – CPI is out today and the market will be anxious to see whether the recent firmer tone to the data has been built upon any further. The CPIX-8 number referred to in the table above is only half the story when it comes to the BoC’s preferred measure of core CPI. 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. 0.5% needs to be added on to the CPIX-8 y/y rate to get to the BoC’s true core measure.

US – PPI and housing starts feature in the US and in recent months the core PPI number has been quite subdued (+1.3% y/y last month). However, core intermediate PPI has been picking up again (+7.9% y/y last time) so an absolute all-clear cannot be signalled just yet. Housing starts are clearly in a downtrend, although m/m volatility is not uncommon in this series. Yesterday’s NAHB housing index fell to a fresh 15-yr low.

Data/event EDT Consensus*

CA CPI (Aug) y/y 07.00 +2.1%
CA CPIX-8 (Aug) y/y 07.00 +1.5%
US Chain store sls (w/e Sep 16) w/w 07.45 -0.3% last
US PPI (Aug) m/m 08.30 +0.2%
US PPI core (Aug) m/m 08.30 +0.2%
US Housing starts (Aug) 08.30 1750k
US Redbook sls (w/e Sep 16) m/m 08.55 0.0% last
US ABC consumer conf (w/e Sep 17) 17.00 -13 last

Latest data Actual Consensus*
DE PPI (Aug) y/y +5.9% +5.9%
DE ZEW expectations (Sep) -22.2 -8
EU ZEW expectations (Sep) -10.2 -4
* 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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