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Wednesday January 17, 2007 - 11:55:47 GMT
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Forex - Mellon FX Daily - U.S. Edition

Mellon FX Daily
06:00 EST Wednesday, Juary 17, 2007

Key Points
• JPY vulnerable with BoJ rates to stay on hold.
• EUR-USD remains subdued – GBP resilient despite earnings data.
• CAD recovery short-circuited by oil – NZD undermined by weak CPI report.
• Several US releases due today

Market Outlook

There has not been much in the Japanese media overnight to counter the news that emerged yesterday about the likelihood of the BoJ leaving rates unchanged on Thursday. Indeed, most media reports have generally backed up this view, which runs counter to the news flow that was developing over the weekend and earlier this week. However, some reports overnight also suggest that the decision is still not completely done and dusted.

What does seem clear is that having canvassed the opinion of BoJ members in recent days, Fukui has found no majority support for a rate hike this week. However, media sources suggest that the BoJ still view the economy as in expansion mode and that the reluctance to hike this week is borne out of a desire for a more cautious approach given the recent softness in consumer spending and CPI. On this basis, there is still a sense that rates will be raised in Feb or later, although this will also be data-dependent and if the data does not fall into place any rate hike could easily be deferred until after the July Upper House elections (our own core view).

On the basis of recent news a rate hike now seems unlikely on Thursday and this should mean more JPY weakness in the short-term. According to news reports, protection of an option barrier at 121 (due to expire today) has apparently been providing some support for the JPY against the USD, although USD-JPY upside is favoured over the next few days (124-125 could be seen over coming weeks). JPY weakness is likely to be seen right across the board.

EUR-USD has been generally disappointing over the past 24 hours. It was not greeted well yesterday by the return of the North American market from Monday’s holiday and has not shown much ability to bounce since then. As noted earlier this week, there could be some speculation that 1.2865 is a possible short-term base, but data on outstanding positions suggest that liquidation pressure may not have passed just yet. The tone of the US data this week will be significant in determining whether 1.2865 holds.

GBP remains firm after yesterday’s strong CPI data and not even a weaker than expected November average earnings number this morning has been enough to puncture market sentiment. 3-mth y/y growth rates for key earnings numbers came out weaker than expected this morning, with the strength of the previous month being exposed as a potential one off. The main driver of October strength had been the private sector exbonuses component. The 3-mth y/y rate on this measure had risen to +3.9% from +3.6%, helped by the single month y/y rate for October rising to +4.2%. However, the latter has been revised down to +4.1% and the single month y/y rate for November fell to +3.7% (leaving the 3-mth y/y rate unchanged at +3.9%).

Nevertheless, while this will be mildly comforting for the MPC, the data is only for November and the MPC will be more concerned about what is happening in the current New Year pay round after the IDS noted last week that January settlements were running closer to 4% than the 3% seen in recent years. EUR-GBP initially rose on the data this morning, but has since fallen back. Key support remains at 0.6545.

The BoC statement yesterday was more upbeat than expected, although a combination of USD strength and a sharply weaker oil price eventually proved too much for the CAD. However, with USD-CAD positioning still very much on the long side, there is still a risk of a pullback. Whether or not 1.18 holds in the shortterm will remain key. Below 1.1740 and 1.1690 is needed to see a renewal of corrective risk after yesterday’s bounce.

NZ Q4 CPI data came out weaker than expected and poses a clear threat to previous assumptions about an RBNZ rate hike next week. The headline rate fell sharply to +2.6% from +3.5%, while most core measures (the RBNZ does not focus on just one of them) were also lower. The weighted median fell to a still elevated +3.3% from +3.6%, the trimmed mean to +3.0% from +3.4%, CPI ex-food, energy & gov’t charges fell to +2.5% from +2.7%, CPI ex-energy & fuel to +2.7% from +2.8%, factor model CPI to +2.6% from +2.8%. The RBNZ has said that it will look beyond any CPI weakness that is purely related to volatility in energy prices, although the latest developments seem to be slightly more than that. Next week’s decision is now a very close one and Friday’s retail sales number could be crucial. The RBNZ has been viewing household demand as an upside risk to CPI. NZD support is at 0.6844.

Day Ahead
US – PPI, TIC portfolio data, mortgage applications, industrial output, the NAHB housing index and the Fed’s Beige Book feature. PPI has lost some of its significance having turned into a series that merely reflects the m/m volatility in the prices of passenger cars and light trucks. These categories have dictated the core PPI outcome in each of the past five months. Mortgage applications were very strong last week, although the data remains highly volatile. The NAHB housing index (currently 32) is only just off the low of 30 seen in September, while the Beige Book will be watched to see whether the observations about pricing pressure are consistent with the more subdued readings recently seen on core consumer price inflation. The TIC data will need to be very unusual to generate any market impact. What has been encouraging in recent months is the ongoing investor interest in US equities, with 2006 (Jan-Oct currently at $107bn) shaping up to be the best year since 2000. Looking at overall net flows on the equity category i.e. including US interest in foreign equities, it looks like being the best year since 2001 (Jan-Oct currently at $41.8bn).

Data/event EDT Consensus*

US PPI (Dec) m/m 08.30 +0.5%
US PPI core (Dec) m/m 08.30 +0.1%
US TIC intl portfolio balance (Nov) 09.00 +$82.3bn last
US Ind prod (Dec) m/m 09.15 +0.1%
US Capacity utilisation (Dec) 09.15 81.7%
US Mortgage apps – purchases w/w 12.00 +16.2% last
US NAHB housing index (Jan) 13.00 33
US Beige Book for Jan 30-31 FOMC 14.00
US Fed’s Yellen speaks 14.50
JP Tertiary index (Nov) m/m 18.50 -0.1%
JP BoJ rate announcement unch
JP BoJ monthly report 01.00

Latest data Actual Consensus*
NZ CPI (Q4) q/q -0.2% -0.1%
NZ CPI (Q4) y/y +2.6% +2.8%
US ABC consumer conf (w/e Jan 14) -2 -5 last
JP Current account (Nov, sa) ¥1.95trn ¥2.1trn
JP Consumer confidence (Dec) 46.3 47.2
GB ILO unemp 3m ave (Nov) m/m -29k -7k last
GB LFS employnt 3m ave (Nov) m/m +14k +41k last
GB Claimant count (Dec) -5.5k -4.0k
GB Average earnings (Nov) 3m y/y +4.1% +4.2%
GB Earnings ex-bonuses (Nov) 3m y/y +3.7% +3.9%
EU CPI (Dec) y/y +1.9% +1.9%
EU CPI ex-energy/fresh food (Dec) y/y +1.6% +1.6%
EU Trade balance (Nov, sa) €4.5bn €2.9bn
* 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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