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Thursday January 25, 2007 - 11:48:03 GMT
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Forex: Mellon FX Daily - U.S. Edition

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

Key Points
• Corrective risk remains on GBP after latest policy revelations, but rate backdrop remains favourable.
• G7 event risk emerges on the JPY – but Watanabe says JPY will not be a highlight at that meeting.
• German consumer confidence weakness raises fresh uncertainty over sales tax hike impact.
• RBNZ advances hawkish message.
• US existing home sales, Japanese CPI feature.

Market Outlook

The JPY has retained a firmer tone overnight with position liquidation the major impetus. Yesterday also saw the first real indication of how the event risk related to the February 9 G7 meeting could affect market sentiment. We referred to this threat yesterday, but it has appeared sooner than envisaged. The story suggested that Europe will be pushing for a stronger message from G7 against a weaker JPY, although this was countered today by MoF FX spokesman Watanabe. He said that the JPY was unlikely to be highlighted at the G7 meeting, but acknowledged that someone may say that the JPY is too weak. The basic interest rate arguments against the JPY (and medium-term downside risk) remain firmly in place, although appetite for JPY shorts may be more restrained in the run-up to this meeting. Data released overnight suggests continuing strength in exports, although CPI data is due this evening (see below for preview).

German IFO data was weaker than expected, due to a fall in the current conditions index, although index levels remain high historically. German consumer confidence was also weaker than expected, falling to a 12-mth low due to a sharp decline in the ‘willingness to buy’ category. Expectations about income and the economy were both up on the month. The outcome is a direct result of the sales tax hike and will raise fresh uncertainty about the impact this will have on the German economy. However, more data is required before getting too excited, as this could be a very short-term phenomenon. EUR-USD remains hemmed in by levels at 1.3050 and 1.2865 – downside is favoured.

GBP retains some corrective downside risk after the MPC revelations of the past couple of days, but overall support looks like remaining fairly solid. Support on cable is at 1.9645 ahead of 1.9590, while EUR-GBP has resistance at 0.6607. This is at risk in the short-term, although 0.6650 is likely to remain intact.

The NZD shrugged off the unchanged rate outcome by the RBNZ, due mainly to the hawkish message that accompanied the decision. The RBNZ said “In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required” adding that “the situation will be reassessed in the light of a full review of our economic forecasts at the March Monetary Policy Statement”. This is a clear threat of rate hike in March and will mean solid support for the NZD over coming weeks unless there is any major slippage in key economic data. Above 0.7040 would mean a retest of the recent high around 0.71.

Day Ahead
US – existing home sales have risen in each of the past two months, but only modestly so and are only just off the lows seen in Q3. Inventories of unsold homes will also be monitored for an overall picture of market conditions. For existing home sales inventories have been steadier over the past few months, after rising sharply in the first half of 2006. The added uncertainty in interpreting the housing data at the present time is that any strength might be artificial and purely related to the unusually mild weather in the US over the past couple of months. Mortgage applications fell yesterday, continuing their recent run of volatility.

Japan – CPI data is due tonight with the BoJ having warned last week about the possibility of softer energy prices weighing on the number in coming months. It is not enough to say that this is a potential distortion on the downside, as core CPI ex-food and energy is at -0.2% y/y. If energy prices soften and bring the headline y/y rate towards the core rate, this will merely represent the removal of a previous upward distortion to CPI. Strength in core rates is required to alleviate current lingering concerns about deflation.

Data/event EDT Consensus*

US Initial claims (w/e Jan 20) 08.30 310k
US Continuing claims (w/e Jan 13) 08.30 2530k last
US Existing home sales (Dec) 10.00 6.25m
JP CPI Tokyo ex-fresh food (Jan) y/y 18.30 +0.2%
JP CPI Nat ex-fresh food (Dec) y/y 18.30 +0.2%
JP CPI Nat ex-food & energy (Dec) 18.30 -0.2% last
JP CSPI (Dec) y/y 18.50 -0.1%

Latest data Actual Consensus*
NZ RBNZ rate announcement unch unch
JP Trade balance (Dec, sa) ¥658bn ¥856bn
CN GDP (Q4) y/y +10.4% +10.2%
CN PPI (Dec) y/y +3.1% +2.8%
CN CPI (Dec) y/y +2.8% +1.9%
CN Ind prod (Dec) y/y +14.7% +15.0%
DE Consumer confidence (Feb) +4.8 +8.3
FR Own company ind outlook (Jan) +14 +10
FR Business climate indicator (Jan) 106.0 106.0
SE Trade balance (Dec) SEK13.8bn SEK12.3bn
DE IFO index (Jan) 107.9 109.0
DE IFO current (Jan) 112.8 115.4
DE IFO expectations (Jan) 103.2 103.0
EU Current account (Nov) -€2.0bn €1.0bn
IT Retail sales (Nov) m/m +0.3% +0.1%
NZ PMI manu (Dec) 54.2 55.1R 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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