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Wednesday January 24, 2007 - 11:56:01 GMT
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Forex: Mellon FX Daily - U.S. Edition

Mellon FX Daily
06:25 EST Thursday, January 24, 2007

Key Points
• King comments, 5-4 MPC vote take the edge off GBP.
• Highly volatile European session, with GBP also driving JPY adjustment for a while.
• Fukui comments should be seen as raising further doubts over likelihood of near-term tightening.
• Aussie CPI dents rate hike hopes, but RBA may still act.
• US mortgage data, Norges Bank and RBNZ policy outcomes feature

Market Outlook

An extremely volatile European morning, with sharp moves seen on GBP and JPY crosses. Overnight comments from King (see below for more) set things up negatively for GBP and the JPY also managed to correct sharply for a while, although this seemed to be triggered by position adjustment on GBP-JPY. It all happened at around 6.30 GMT this morning. Cable started to slide first along with GBP-JPY then USD-JPY and EUR-JPY also fell back quite sharply. Having led the way higher against the JPY in recent days, GBP led the way back down earlier today (the lower cable also brought EUR-USD back down at the time). However, the JPY weakness proved short-lived and USD-JPY in particular is back close to where it was late yesterday (having traded as low as 120.65 earlier in Europe).

Further comments about the JPY appear below but it is probably best to start with GBP. BoE governor King reaffirmed last night that the MPC remains of the view that inflation will fall back in the second half of this year, possibly quite sharply. He said that the MPC had decided to act early on policy to head off the increased upside risk to CPI, based in part on the possibility of higher wage demands and that by doing so the MPC would ultimately need to raise interest rates by less than would otherwise be the case. The comments comforted the money market and hit GBP and were followed this morning by a set of MPC minutes that revealed a slender 5-4 vote in favour of the recent rate hike. Together the events suggest that the January hike was a precautionary one and that much of the debate was about whether they should hike in Jan or wait until Feb rather than Jan representing an ‘extra’ hike. It is of course not implausible that the data continues to develop in a manner that will force them into making further precautionary moves. For example, the market will remain nervous about anything that suggests higher pay settlements and this morning’s 1st estimate of Q4 GDP was also stronger than expected at +0.8%. However, the two rate hikes still discounted in the money market for the first half of this year (even after this morning’s adjustment) looks to be an extreme scenario. Cable fell further on the minutes and very briefly traded just below 1.9700, although this was quickly reversed. Resistance is now at 1.9800-30 and in the short-term there could be selling into rallies and downside risk. Support is at 1.9670-1.9700. Above 0.6607 on EUR-GBP is required to generate some extra corrective risk on that cross.

The JPY has had a very choppy session for the reasons outlined above and the temporary strengthening may have also been driven by he correction in the AUD, which had been earlier hit by weaker than expected CPI data (see below for more). The so-called high-yielders have taken a slight blow. There may be more left in this in the very short-term, but all of the JPY vulnerabilities remain very much intact.

Late yesterday (18.05 GMT) Reuters published an interview with BoJ governor Fukui (unusual in itself), where he tried to outline BoJ thinking on future policy. He said they would remain cautious as long as the data were mixed and that there was no set schedule for hiking rates. He also said that policy would not be affected by political timetables i.e. July Upper House elections. With regard to the split on the BoJ board, he said it was uncertain whether this would narrow soon. He also said that Q4 GDP data (due on February 15) would be an important indicator but that BoJ policy would not be based on this data alone. Overall, we would see this as reaffirming the fact that a Feb hike is not a done deal and If anything he seems to be placing more weight on the idea that the BoJ will remain cautious until key data uncertainties (i.e. relating to consumer spending and CPI) fall into place (our own view is that rates are left on hold until Q3). On this basis the JPY outlook for medium-term remains a gloomy one, although the approach of the Feb 9 G7 meeting and the risk of some cautionary comments (however small) may lead to a pause before the next significant downward adjustment.

Australian CPI came out much weaker than expected (including some core measures) and in doing so it has raised major doubts over the inevitability of a February rate hike. Aussie rate futures have moved around 15-20bp with Mar and Jun now set at 6.41% and 6.44% respectively (RBA cash rate is currently 6.25%). Headline CPI eased to +3.3% in Q4 from +3.9% in Q3 – the market had expected +3.6%, while the RBA’s trimmed mean measure also undershot expectations (+2.9% compared to +3.1%, although it was unchanged from +2.9% in Q3). CPI market prices came in at +2.3%, in line with expectations, although up from +2.1% in Q3. On the face of it the data may allow the RBA some more time to think about how key trends are progressing, although with other data such as employment, consumer sentiment, private sector credit and retail sales all showing strength or solidity the RBA could still justify another move. Choppy trading looks likely on the AUD – support at 0.7760-90.

Day Ahead
US - while weekly mortgage applications (due today) continue to show volatility on a week-to-week basis, they are still well above the levels seen for much of 2006.

Norway – the Norges Bank meet and are likely to leave policy unchanged after having raised rates as recently as December 13. Some enduring stability in the oil price is required to revive confidence in the NOK, although we would expect EUR-NOK to top out before the 8.50 high seen last year and a move to 8.00 and lower should be seen in the medium-term.

New Zealand – last week’s softer than expected CPI data and slightly weaker than expected retail sales may just be enough to persuade the RBNZ into leaving rates unchanged at tonight’s meeting, although it is a very close call, their trigger finger having been poised for several months in readiness for action. The absence of a rate hike is unlikely to be a major negative for the NZD, as it will clearly retain its high-yield status. It is not as if the market will be confident in calling a peak in NZ rates and this much should be made clear in the RBNZ statement.

Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 -7.0% last
NO Norges Bank policy outcome 08.00 unch
BE Business confidence (Jan) 09.00 +2.5 last
NZ RBNZ rate announcement 15.00 unch
JP Trade balance (Dec, sa) 18.50 ¥856bn
JP BoJ’s Suda spks 20.30
CN GDP (Q4) y/y 21.00 +10.2%
CN PPI (Dec) y/y 21.00 +2.8%
CN CPI (Dec) y/y 21.00 +1.9%
CN Ind prod (Dec) y/y 21.00 +15.0%
JP BoJ’s Suda press conf 23.30

Latest data Actual Consensus*
US ABC consumer conf (w/e Jan 21) -3 -2 last
JP All-industry index (Nov) m/m -0.2% 0.0%
AU CPI (Q4) q/q -0.1% +0.2%
AU CPI (Q4) y/y +3.3% +3.6%
AU CPI mkt prices ex-volatile (Q4) y/y +2.3% +2.3%
AU CPI-RBA trimmed-mean (Q4) y/y +2.9% +3.1%
SE Unemployment rate (Dec, nsa) 4.6% 4.6%
IT Consumer confidence (Jan) 110.3 113.3
GB MPC minutes (Jan 8-9 meeting) 5-4 in favour of 25bp hike
GB GDP (Q4, 1st est) q/q +0.8% +0.7%
GB Services index (3mths to Nov) q/q +1.0% +0.9% last
ZA CPI (Dec) y/y +5.8% +5.9%
ZA CPIX (Dec) y/y +3.8% +3.9%
* 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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