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Tuesday October 31, 2006 - 12:08:02 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD weaker in early European trading.
• Eurozone CPI softer than expected, but ECB implications limited.
• BoJ fails to provide fresh guidance on policy risk.
• USD-JPY downside risk remains while below 118.05-20.
• Australian private sector credit data supports rate hike expectations.
• EUR-NOK eyeing oil price and tomorrow’s Norges Bank meeting.
• EUR-GBP testing key support at 0.6680-85 but CBI retail sales weaker.
• US employment cost index, consumer confidence, Canadian GDP, BoE’s King feature.

Market Outlook

EUR-USD slipped back early in Europe, having eased below yesterday’s low around 1.2700. However, the move has not progressed that much and support is at 1.2650-60 on any further downdrift today, while short-term resistance is at 1.2700- 05 ahead of 1.2750. Major movement looks unlikely until the main events of the week (US ISMs and employment report, ECB meeting) have been seen, but there are some important US releases today (see Day Ahead below). Eurozone data this morning does not really add anything fresh to the ECB’s information set. CPI was weaker than expected, helped by a softer CPI number out of Italy, although the Italian weakness was once again primarily due to weaker fuel prices.

The BoJ left rates unchanged, while it maintained a steady outlook with regard to GDP and CPI. The CPI ex-fresh foods forecast for the FY ending Mar 07 was reduced to +0.3% from the +0.6% forecast seen in April, while the forecast for the FY ending Mar 08 was reduced to +0.5% from +0.8%. The upward trajectory remains intact but the level has been reduced in line with the downward revisions to the index seen in August.

BoJ governor Fukui said that rate hikes would be gradual if conditions developed in line with their forecasts but that he had no pre-set ideas on the timing of any moves. In this regard he said he could not rule out a rate hike before year-end. He also said that the corporate sector had been stronger than they expected, but consumption had been weaker, adding that the latter needed to be monitored. However, he also said that the low level of interest rates would gain more potency against a background of higher corporate profits. Impact on rate hike expectations has been limited. The risk of a move before yearend remains in place, but he has not said anything today to advance this threat any further and the market will suspect that they may wait until Q1. However, USD-JPY will retain some short-term downside risk while below 118.05-20, with liquidation risk still high.

Australian private sector credit was up 1.0% m/m in September and the fact that it did not decelerate any further after the softer +0.9% showing in August (the lowest since July 2005) is significant. Further weakness would have raised the impression that tighter policy was already having an impact and this could have raised a few doubts about near-term RBA tightening. As it stands the market will still be looking for a rate hike next week. 0.7700-25 remains the main barrier to AUD strength ahead of that event.

GBP was hurt by a weaker than expected CBI retail sales survey, with a balance of 4% of retailers reporting a y/y fall in sales volumes (weakest since March). The previous month had seen 14% reporting a y/y rise in volumes. The data followed a marginally stronger than expected consumer confidence number, while BoE governor is still to talk this afternoon (see below). At first glance, there was always the possibility that the weaker sales number was due to recent warm weather hitting spending on winter clothing, although the CBI said that clothing sales had in fact been quite solid. EUR-GBP did have another dip below 0.6680 today, but a close below here is needed to open up some downside risk. Even then the market may remain hesitant with the ECB meeting still outstanding.

EUR-NOK was up yesterday on the continuing reverse in the oil price and it would probably be higher if not for the fear of a more hawkish presentation by the Norges Bank at tomorrow’s meeting. Tomorrow will be a key day, not only for the Norges Bank statement but also the weekly oil inventory report out of the US. Recent oil price weakness reflects growing sentiment that the supply disruptions seen in last week’s report will be reversed.

Day Ahead
UK – BoE governor King testifies to the Lords’ Economic Affairs Committee and the indications are that they will be asking questions on what will affect inflation over the coming year, how the MPC should react to ‘demand pull’ as opposed to ‘cost push’ inflation, asset prices and whether the changes in the way GDP is calculated has presented problems for the MPC. King will be keen not to give too much away ahead of next week’s MPC meeting and forthcoming Inflation Report, but he is likely to maintain a relatively hawkish viewpoint, especially with regard to inflation risk.

US – consumer confidence should be well supported by recent developments in fuel prices and strong equity markets and this has been largely factored in by the market expectation of a rise to 108.0 from 104.5. The Q3 employment cost index is also out and will be watched for labour cost pressures. Last time, Q2 data was a little stronger than expected, with the 0.9% q/q rise in the wage and salaries component the highest seen since Q1 2003, when it was also +0.9%. Chicago PMI is also out.

Canada – with the market having become a little uncertain about the current state of the Canadian economy (last week’s business survey was disappointing) this week’s data could be significant. Monthly GDP is due today and this recovered slightly in July (+0.2%) after the soft showings of May and June (the latter may have been due to the spending pause ahead of the July sales tax cut). A further rebound is needed to suggest that underlying activity is getting back to normal and the market is looking for +0.3%.

Data/event EDT Consensus*

US Chain store sls (w/e Oct 28) w/w 07.45 -1.1% last
US Employment cost index (Q3) q/q 08.30 +0.8%
CA GDP (Aug) m/m 08.30 +0.3%
US Redbook sls (w/e Oct 28) m/m 08.55 +1.3% last
TR Trade balance (Sep) 09.30 -$4.5bn
US Consumer confidence (Oct) 10.00 108.0
US Chicago PMI (Oct) 10.00 58.0
GB BoE’s King testifies 10.40
US House prices (Aug) y/y 14.15 +6.7% last
US ABC consumer conf (w/e Oct 29) 17.00 -7 last
AU Building approvals (Sep) m/m 19.30 +2.2%
CN PMI manu (Oct) 20.00 57.0 last

Latest data Actual Consensus*
FR Unemployment rate (Sep) 8.8% 8.9%
FR ILO job seekers (Sep) m/m -50k -20k
JP Unemployment rate (Sep) 4.2% 4.1%
JP Job-to-applicants ratio (Sep) 1.08 1.09
JP Overall PCE (Sep) y/y -6.0% -2.1%
AU Private sector credit (Sep) m/m +1.0% +1.0%
JP BoJ rate announcement unch unch
JP Housing starts (Sep) y/y +4.0% +2.2%
JP Small business confidence (Oct) 49.8 50.1 last
DE Retail sales (Sep) m/m -1.7% +0.6%
GB Nwide house prices (Oct) m/m +0.7% +0.7%
FR Consumer confidence (Oct) -21 -20
EU CPI (Oct, flash est) y/y +1.6% +1.7%
EU Econ sentiment (Oct) 110.3 109.5
EU Business climate index (Oct) 1.42 1.43
IT CPI (Oct, prel) y/y +1.8% +2.0%
GB Consumer confidence (Oct) -5 -6
GB CBI retail trades survey (Oct) -4 +14 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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