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Thursday December 21, 2006 - 11:49:14 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• JPY shows some corrective strength, but vulnerability will remain as market revisits BoJ policy assumptions.
• EUR-USD steady ahead of Philly Fed today, core PCE prices tomorrow.
• NZD retreats from 0.70 after GDP data, but yield arguments remain positive.
• US GDP, Canadian GDP and retail sales also feature today.

Market Outlook

Some profit taking has been seen on the JPY in Europe this morning, especially EUR-JPY, which had earlier reached a new record high of 156.41. There have been rumours of EUR-JPY selling by an Asian central bank, although with market exposure high and the holiday season approaching, positioning was always going to be a little jumpy. USD-JPY has also weakened, although with EUR-JPY leading the way EUR-USD has been dragged lower.

The JPY had been showing more weakness prior to these developments despite some better news on the data side, with exports bouncing back strongly in November after two flat months. It is clear that the more dovish presentation from Tuesday’s BoJ meeting is continuing to resonate and is prompting the market to revisit the BoJ rate hike assumptions previously pencilled in for next year.

Our own feeling is that the window of opportunity for a rate hike is closing and in the absence of a distinctive pick-up in consumer spending and CPI data in the months ahead, this will now be delayed until Q3. The government faces key Upper House elections in July and will be mindful of any upset to the public. In other words, they will be pressuring the BoJ to avoid a rate hike unless fully justified by the data. The JPY will be extremely vulnerable if this scenario unfolds, with 160 on EURJPY and 123-125 on USD-JPY looking likely. However, there is a risk of more profit taking in the short-term, with 155.00 possible on EUR-JPY.

EUR-USD had been looking fairly settled before the move in EUR-JPY and so far yesterday’s low at 1.3160 has held. Other key parameters to look at in the short-term come in at 1.3290 and 1.3120-30. A break of the former would raise hopes of a fresh move and possible break of the recent highs around 1.3370, while below the latter would spark fears of more corrective activity and a test of key levels in the 1.2950-1.3050 area. Having moved lower earlier in the week, a test of the upside may be seen initially, although EUR-JPY does present a risk. There are some US data releases today – final estimate of Q3 GDP, weekly jobless claims, Philly Fed survey (see below for preview) – and it is the latter that is likely to be the most significant. There are more releases due tomorrow in the form of core PCE prices, durable orders and Michigan sentiment. However, being the last day before the holiday period, the market may have lost interest by then.

UK Q3 GDP was unrevised at +0.7% q/q, but the y/y rate was revised up to +2.9% from +2.7% previously, reflecting modest upward revisions across the profile over the past couple of years. Market impact was limited.

The NZD has retreated from an attack on 0.70, in part because of the softer than expected Q3 GDP number released last night (+0.3% compared to expectations of +0.5%). This is unlikely to be enough to snuff out expectations of an RBNZ rate hike in January and the NZD is likely to retain its appeal, especially with the JPY looking fragile. The NZD is the obvious high yielding beneficiary if the low-yielding JPY suffers further.

Day Ahead
US – the final estimate of Q3 GDP is due in the US, although major revisions to the 2nd estimate look unlikely. It is the Philly Fed number that will be in focus today. This has been soft in recent months and certainly more in tune with the developments on ISM manufacturing than the NY Fed survey. This would seems to suggest a weak reading for December, although any rebound would boost hopes of a better ISM on January 2.

Canada – retail sales and monthly GDP numbers are due and with monetary policy expectations currently hanging in the balance after some signs of weaker activity, there is clearly market moving potential.


Data/event EDT Consensus*

US GDP (Q3, final) saar 08.30 +2.2%
US Core PCE prices (Q3) saar 08.30 +2.2%
US Initial claims (w/e Dec 16) 08.30 315k
US Continuing claims (w/e Dec 9) 08.30 2477k last
CA Retail sales (Oct) m/m 08.30 -0.4%
CA Retail sales ex-autos (Oct) m/m 08.30 -0.1%
CA GDP (Oct) m/m 08.30 +0.1%
US Lead indicators (Nov) m/m 10.00 +0.1%
US Philly Fed index (Dec) 12.00 +3.8
US Fed’s Lacker on econ outlook 13.00

Latest data Actual Consensus*
NZ GDP (Q3) q/q +0.3% +0.5%
JP Trade balance (Nov, sa) ¥991bn ¥658bn
JP Exports (Nov, sa) m/m +2.6% +0.5% last
JP All-industry index (Nov) m/m +1.7% +1.6%
IT Consumer confidence (Dec) 113.6 109.2
NO Unemployment rate (Dec) 2.1% 2.1%
GB GDP (Q3, final) q/q +0.7% +0.7%
GB Current account (Q3) -£9.4bn -£7.7bn
IT Retail sales (Oct) m/m -0.1% +0.1%
* 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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