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Thursday January 4, 2007 - 11:22:45 GMT
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Forex: Mellon FX Daily - U.S. Edition

Key Points
• Yesterday’s price action reveals where short-term USD bias lies unless current positioning is backed up by weak data.
• Corrective pressure has continued this morning, with the USD higher and JPY crosses getting hit.
• FOMC minutes do not reveal anything significant – but there have been new inflation developments since Dec 12.
• Strong UK PMI services aids GBP against EUR.
• US non-manufacturing ISM and pending home sales feature today.

Market Outlook

Corrective pressure has continued to dominate trading in Europe this morning, with both the USD and the JPY the main beneficiaries. Yesterday’s stronger than expected ISM manufacturing does not entirely resolve concerns about the US manufacturing sector (51.4 is not exactly strong), while the ADP employment measure (for all its shortcomings) leaves some downside risk for Friday’s payrolls number. However, USD shorts clearly needed more than this to sustain positioning and the price action once again revealed where short-term risk lies if such positioning is not wholeheartedly supported by weak US economic news.

The spotlight now turns to today’s non-manufacturing ISM (see below), although unless there is a strong number, some doubts may remain about tomorrow’s employment report and this should provide some element of support for EUR-USD. Still, solid numbers today and tomorrow would leave EUR-USD open to more corrective weakness. Major short-term support lies in the 1.2950-1.3050 area.

USD-JPY looks fairly steady and 120.00 may be tough to break this week unless there is further significant encouragement for the USD. USD-JPY has some protection on the upside due to the fact that USD strength against many currencies is threatening long positioning in those currencies against the JPY e.g. EUR-JPY, AUD-JPY, NZD-JPY and GBP-JPY.

The FOMC minutes saw a reiteration of the ‘upside risk to inflation’ message offered in the Dec 12 statement, which was not that surprising, although one member said that the statement should have acknowledged that rates could be cut if growth and prices turned out weak. Of course, things have moved on a little since Dec 12, most notably the weakness seen in the core CPI and core PCE prices data (both recorded zero m/m readings). Another set of these numbers will be released by the time of the January 31 policy outcome and they could yet influence sentiment about what the Fed offers in its next statement.

Service sector PMI data this morning favoured the UK over the Eurozone, whereas the opposite was the case on Tuesday with the manufacturing PMI releases. The Eurozone service sector PMI of 57.2 was slightly weaker than expected, but the UK number of 60.6 was well ahead of expectations and the strongest since June 1997. Mortgage data in the UK was also strong, although consumer confidence weakened again in December to its joint lowest level for 2006 (with August) of -8. Overall, the service sector PMI will offer support to expectations of a possible Feb UK rate rise and this should help to remove the upside risk in place on EUR-GBP after yesterday.

Day Ahead
US – there are a number of releases due including non-manufacturing ISM, factory orders and pending home sales. The ISM will be the main feature to see whether the weaker tone in manufacturing is starting to spread in any way. Whether or not this occurs will be a key factor for sentiment about the US economy, Fed policy and the USD. Thus far the non-manufacturing ISM has been fairly strong. Factory orders are likely to reflect the weakness already seen in the durable orders release, although the latter could be subject to revisions. Pending home sales have shown some volatility in recent months, although as yet there is no clear sign of any turn in the downtrend seen over the past year.

Data/event EDT Consensus*

GB MPC’s Blanchflower speaks 07.30
US Challenger layoffs (Dec) y/y 07.30 -22.7% last
US Initial claims (w/e Dec 30) 08.30 320k
US Continuing claims (w/e Dec 23) 08.30 2530k last
CA Industrial PI (Nov) m/m 08.30 +0.7%
CA Raw materials PI (Nov) m/m 08.30 +1.1%
TR CPI (Dec) y/y 09.30 +9.9%
US ISM non-manu (Dec) 10.00 57.2
US Factory orders (Nov) m/m 10.00 +1.3%
US Pending home sales (Nov) m/m 10.00 +0.8%

Latest data Actual Consensus*
NZ Trade balance (Nov) -NZ$0.79bn -NZ$0.84bn
CH CPI (Dec) y/y +0.6% +0.6%
NO PMI manu (Dec) 61.7 60.6
IT PMI services (Dec) 55.0 56.1
FR PMI services (Dec) 57.6 59.1
DE PMI services (Dec) 57.6 57.0
EU PMI services (Dec) 57.2 57.6
GB PMI services (Dec) 60.6 59.5
GB Consumer credit (Nov) +£1.0bn +£1.1bn
GB Net lending sec’d on dwellings (Nov) +£9.8bn +£10.0bn
GB Mortgage approvals (Nov, sa) 129k 128k
EU CPI (Dec, flash est) y/y +1.9% +1.9%
IT CPI (Dec, prel) y/y +1.9% +1.9%
GB Consumer confidence (Dec) -8 -6
* 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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