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Tuesday October 24, 2006 - 10:37:28 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• USD firmness to remain ahead of FOMC, but reiteration of modest tightening bias may now be largely priced in.
• The week’s US data could be more significant for the USD.
• JPY remains weak – Friday’s Japanese CPI could be significant in determining whether 120 holds on USD-JPY.
• AUD and NZD in focus ahead of key CPI releases tonight.
• US weekly store sales also feature.

Market Outlook

The USD has remained reasonably solid though the night, with most unwilling to combat this tone ahead of tomorrow’s FOMC meeting. However, supports at 1.2460-90 on EUR-USD look like remaining intact for now and would most probably only be threatened if the FOMC language is more aggressive than expected and/or key US data this week turns out on the strong side, neither of which is assured. The FOMC are likely to retain a tightening bias but this is unlikely to be more acute than that seen at the last meeting. With future policy still data dependent they are quite simply not in a position to be more unequivocal. The market has most probably already adjusted to this reality and this week’s economic data is perhaps the bigger uncertainty. Today sees the weekly store sales release and while the market typically does not pay much attention to this data, it has been advancing well so far in October, supporting the contention that weaker fuel prices are supporting spending.

USD-JPY settling above 119.25 is also a positive step and suggests an approach up to the recent high at 119.87. However, It remains unclear whether outstanding JPY short positioning is consistent with a fresh push lower on the JPY just yet. A close above 120 on USD-JPY is needed to suggest an extension higher and Friday’s CPI data could be significant in determining how this develops.

The AUD and the NZD face up to their respective Q3 CPI releases tonight (see below for preview) and both numbers will carry implications for near-term policy decisions. Both have eased off a little in the past 24 hours, aided by a stronger USD, but the AUD has held above support at 0.7550-60, while the NZD has stayed above 0.6610-20. As long as there is no surprising weakness in tonight’s CPI both should advance further in the short-term. 0.7600-20 is resistance on the AUD, while 0.6700-25 could be more difficult for the NZD.

Monthly and quarterly UK CBI trend surveys were both weaker than expected, with orders falling back from the highs of the previous month and output expectations and general business optimism also lower. CBI data is not adjusted for seasonal factors so can exhibit some volatility, so for now this will be taken as no more than an initial warning about the possibility of slower times ahead in manufacturing. Other data like PMI and official manufacturing output will now be examined.

Day Ahead
Australia – Q3 CPI data is out tonight and will be significant for near-term RBA policy expectations. Apart from a softer private sector credit number for August, other data (employment, consumer sentiment) has remained fairly strong, suggesting that more policy tightening is necessary. A weak CPI number will probably be required to prevent a tightening in November or December. Any strength would pretty much guarantee a tightening in November. While fuel prices will weigh on headline CPI, most of the core measures are likely to show strength.

New Zealand – CPI data is also out in New Zealand and a softer headline y/y rate is likely due to weaker fuel prices (market expects +3.8% down from +4.0% last time). The index has undergone a major revision of weights ahead of this release, including an upgrade in the transport category (because of petrol) to 17.2% from 15.5%. This will tend to amplify the impact on the y/y rate of lower fuel prices. The RBNZ tends to focus on the headline CPI rate rather than core rates, but has been acknowledging a role for core measures given the noise coming from fuel prices. Up until recently they looked at the ‘weighted median’ CPI, which last quarter stood at +3.2% y/y up from +3.1% in Q2. In last month’s Monetary Policy Statement they expressed more of a preference for a trimmed mean measure (also +3.2%), while another measure mentioned, based on the common variation in the disaggregated price series, is only +2.7%. The RBNZ has a target range for CPI over the medium-term of 1% to 3% and they concluded last time that underlying inflation remains at high levels, near to the top of their desired range.

Any surprising strength in this data would reinforce the likelihood of a rate hike by the RBNZ, who are due to announce their latest policy decision tomorrow night. The market is fairly split on the likely outcome of that meeting. At their last meeting in September the RBNZ said there was “little leeway to withstand further surprises to medium-term inflation pressures” and “we are less confident that no further policy tightening will be required in this cycle”. The CPI data will therefore be critical to their decision.

Data/event EDT Consensus*

DE CPI states (Oct, prel) m/m from today -0.1%
DE CPI states (Oct, prel) y/y from today +0.9%
US Chain store sls (w/e Oct 21) w/w 07.45 +0.6% last
US Redbook sls (w/e Oct 21) m/m 08.55 +1.4% last
BE Business confidence (Oct) 09.00 +4.4
CH SNB’s Roth speaks 11.45
EU ECB’s Quaden spks 14.00
US ABC consumer conf (w/e Oct 22) 17.00 -7 last
NZ CPI (Q3) q/q 17.45 +0.8%
NZ CPI (Q3) y/y 17.45 +3.8%
NZ CPI weighted-median (Q3) y/y 17.45 +3.2% last
JP Trade balance (Sep, sa) 19.50 ¥505bn
AU CPI (Q3) q/q 21.30 +0.7%
AU CPI (Q3) y/y 21.30 +3.7%
AU CPI mkt prices ex-volatile (Q3) y/y 21.30 +2.1%
AU CPI-RBA trimmed-mean (Q3) y/y 21.30 +3.0%

Latest data Actual Consensus*
FR H’hold consumption (Sep) m/m -2.7% -1.3%
IT Consumer confidence (Oct) 108.6 109.6
EU Current account (Aug) -€6.9bn -€4.8bn last
EU Manu orders (Aug) m/m +3.7% +2.3%
GB CBI survey – mthly orders balance -20 -5 last
GB CBI survey – qtrly optimism -10 -6 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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