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Wednesday September 27, 2006 - 10:30:43 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD steady in Europe after stronger Eurozone data.
• JPY was hurt by yesterday’s US data, although positional factors should provide support ahead of Friday’s CPI report.
• EUR-GBP moves back above 0.6700 on Blanchflower comments but downside risk remains below 0.6740.
• NZD hurt by Cullen comments.
• Norges Bank policy outcome, US durables and new home sales amongst today’s features.

Market Outlook

Yesterday’s EUR-USD move back below 1.2740 suggests that last Thursday’s move higher was something of a false break and that the market is perhaps still not ready to countenance a fresh move against the USD. This does leave some downside risk on EUR-USD with short-term positioning still on the long side and a move below 1.2630 would likely unlock further corrective losses to the 1.2500-70 area. However, more strong data out of the Eurozone this morning (Italian business confidence and money data) does serve to highlight the EUR’s medium-term attributes. US durable orders and new home sales are due today (see below).

The stronger than expected US consumer confidence data prompted a jump in USD-JPY, highlighting the low-yielding JPY’s ongoing vulnerability to news regarding interest rate matters. This also provided a much-needed fillip for EUR-JPY, which prior to this looked set to test and possible break key support at 147.60. However, there remains some downside risk on EUR-JPY given outstanding positioning and key now is whether this can be averted until the CPI data is seen on Friday. The tone of that release will be significant in determining whether market appetite for holding JPY shorts is extended. Today’s US data will also be influential.

EUR-GBP had been comfortably holding on to the weakness (below key 0.6700 support) seen yesterday until the MPC’s Blanchflower advanced his latest series of dovish comments. He is the one who voted against a rate hike in August, so his views are not necessarily representative of other MPC members, although the comments were enough to tip EURGBP shorts out of the market and the move was aided later on by the downward revision to Q2 GDP, even though the data is a little ‘old’. Later in the morning CBI retail sales came out stronger than expected. The EUR-GBP move has therefore being something of a false start, although there is a risk of another attempt on the downside in the short-term. Not much has really changed from yesterday.

Lots of comments overnight from NZ finance minister Cullen in an interview with Bloomberg. First off he said that much of the NZD’s recent rise was probably due to hedge fund buying and that there would be a risk of a sharp fall once such positioning was liquidated. Second, he was keen to push the view that the RBNZ was unlikely to hike rates again in this cycle. He said that “some of the markets outside New Zealand have taken what Alan (RBNZ governor Bollard) said as a harder message than was Alan's actual intention'' and “a lot of that statement was with an eye on the New Zealand domestic scene.'' He added that what Bollard was really saying was “I haven't got my finger on the trigger but don't forget there is a gun in the drawer.''

All of this is open to interpretation, but the RBNZ did make it clear in their recent statement that “we are less confident that no further policy tightening will be required in this cycle” – they also saw “more inflation pressure than in earlier reviews” and concluded that “there is little leeway to withstand further surprises to medium-term inflation pressures”. Key will be the Q3 CPI data that is released the day before the next RBNZ meeting, while Friday’s Q2 GDP number will also be influential. However, it is the determination of Cullen to stop NZD advances (he has spoken on several occasions over the past couple of weeks) that the market is essentially responding to. The Cullen comments inflicted a lot of damage on the NZD late yesterday evening, although recent support in the 0.6550-60 area has remained intact and a move below 0.6535 is required to undermine the recent positive move. Back above 0.6620 is needed to take the pressure off and this may be pursued today.

Day Ahead
Norway – the Norges Bank meet and the market is not expecting any rate hike (they hiked rates 25bp on August 16). However, it will be interesting to see what they say about recent NOK weakness. In recent policy statements they have mentioned the strong NOK as a downside risk to CPI so the language on this subject is likely to be modified. One of the other risks they have been mentioning is the upside risk to CPI from leaving interest rates too low for too long and one could argue that this is now more potent given the reduced upside CPI risk from the NOK. How they deal with this issue will be important for policy expectations and the NOK. A NOK recovery is ultimately favoured in the months ahead.

US – durable orders and new home sales are due. New home sales fell sharply last month, so there is an outside chance of a rebound or much shallower decline on this occasion given the natural volatility in this series. However, the overall downtrend looks well established. The market will be anxious to see whether the evidence about manufacturing weakness provided by last week’s Philly Fed survey is replicated in other data and this is why durable orders will be watched. Core durable orders measures have been fairly solid in recent months and a softer number is probably overdue. However, it will take a couple of weak months before the market gets worried about this series (see chart for strength of current trend). Next Monday’s ISM manufacturing is the next key activity number.

Data/event EDT Consensus*

NO Norges Bank policy outcome 08.00 3.0%
US Durable orders (Aug) m/m 08.30 +0.5%
US Durables ex-transport (Aug) m/m 08.30 +0.4%
US New home sales (Aug) 10.00 1050k
US Fed’s Kroszner on productivity 13.00
JP Retail sales (Aug) y/y 19.50 +0.1%
US Fed’s Hoenig on econ & policy 21.45
JP BoJ’s Iwata spks 00.45

Latest data Actual Consensus*
US ABC consumer conf (w/e Sep 24) -12 -15 last
DE Consumer confidence (Oct) 8.8 8.6
SE Consumer confidence (Sep) 18.6 17.0
SE Manufacturing confidence (Sep) 4 5
IT Business confidence (Sep) 97.3 94.4
EU M3 (Aug) y/y +8.2% +7.5%
EU M3 (Aug) 3m y/y +8.2% +7.9%
EU Private sector lending (Aug) y/y +11.3% +11.1% last
IT Retail sales (Jul) m/m +0.3% +0.2%
GB GDP (Q2, final est) q/q +0.7% +0.8%
GB Current account (Q2) -£7.0bn -£8.0bn
GB BBA mort approvals (Aug, nsa) y/y +3.0% +5.0% last
CH KOF indicator (Sep) 2.32 2.42
ZA CPI (Aug) y/y +5.4% +5.4%
ZA CPIX (Aug) y/y +5.0% +5.0%
GB CBI retail trades survey (Sep) +14 +12 last
* 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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