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Tuesday February 13, 2007 - 11:32:05 GMT
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Forex News: Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:10 EST

Key Points
• JPY strengthens a little with market a touch uneasy ahead of Thursday’s GDP outcome.
• EUR receives modest boost from German/French GDP data, but key US events are awaited.
• GBP vulnerable to further weakness after CPI report.
• US and Canadian trade data feature today

Market Outlook

GBP fell back following weaker than expected CPI numbers. The headline CPI y/y rate fell to +2.7% from +3.0%, while core CPI eased back to +1.6% from +1.8%. This is the latest of a number of news items over the past week or so that suggests a lower than expected inflation threat. Last week’s announcement by British Gas of sharp cuts in natural gas (17%) and electricity (11%) prices will weigh down on inflation in coming months and further cuts look likely given what has been happening to wholesale prices through 2006. This will be in sharp contrast to the hefty rises in utility prices recorded in May last year and will generate very negative base effects for the CPI y/y rate from now until mid-year. Negative base effects should also come into play on the food category around the same time. Of course, the MPC has also been concerned about core CPI, given that elevated headline rates, while temporary, could still lead to excessive wage rises that might endanger the core CPI outlook. However, the latest news on pay trends (see yesterday’s FX Daily) has been more encouraging so even these concerns may not be as bad as first feared.

The net result is that GBP is vulnerable to further weakness, especially when one considers that the money market has been discounting two more rate hikes from the MPC over coming months. Even after today’s release the June short sterling future is still discounting 3-mth money at 5.73% compare to 5.81% before the data. The Inflation Report is still to come tomorrow, while average earnings appear on Thursday and retail sales is due on Friday, but there will need to be some decent strength in these releases to prevent further corrective moves in the short-term. EUR-GBP has some upside risk while above 0.6680 and this would extend further above 0.6700 (up towards 0.6750-65). Cable has downside risk towards1.9260-1.9320 while it stays below 1.9440.

The JPY has strengthened overnight with the market now focussing on Thursday’s Japanese GDP and the possibility of a strong number that may raise the threat of a BoJ tightening on Feb 21. As noted yesterday, there is certainly some reason for caution ahead of the GDP release as a stronger than expected outcome would raise more corrective risk on the JPY, but the risk of a rate hike would still remain very low given the weakness in CPI and consumer spending data. Also note that the strength of Q4 GDP would merely be a reaction to the very weak outcome (+0.2% q/q) seen in Q3, with the unevenness due to some volatility in consumer expenditure. Overall, we would still see the likelihood of further JPY weakness in the weeks to come, but cautious trading is likely at least until the GDP outcome is seen. Depending upon the nature of that release the market may not be willing to contemplate the next decent downmove in the JPY until after the BoJ meeting. Some short-term corrective risk will remain on EUR-JPY while below 158.40 – above there would suggest underlying strength and a likely retest of the recent high at 159.00.

EUR-USD remains firmly stuck in its recent trading range but has been boosted this morning by stronger than expected Eurozone GDP numbers. There may be some further modest upside today, although range trading looks like continuing in the short-term unless there are any surprises in the US data this week. Trade data is due today, while retail sales, business inventories/sales, NY/Philly Fed surveys, ind prod, the TIC data, NAHB housing index, housing starts, building permits, PPI and Michigan sentiment are also due later this week. Bernanke’s semi-annual policy testimony is tomorrow.

Day Ahead
US – monthly trade data will be watched to see whether the recent improvements have been sustained. The data is for December and the price of oil was slightly higher that month compared to Oct and Nov, but the deficit looks like staying under reasonable control for now.

Canada – trade data also features in Canada today. Exports bounced back last month, although this only partly corrected the weakness of the previous two months and the overall trend remains flat over the past year or so. The CAD has been well supported since Friday’s solid employment data and some USD-CAD downside risk will remain in place while it stays below the 1.1785-1.1815 area. The market has been very long of USD-CAD and further good news on the data front would suggest liquidation risk. Below 1.1700 would leave risk to the 1.1600-50 area.

Data/event EDT Consensus*

US Chain store sls (w/e Feb 10) w/w 07.45 +1.3% last
US Trade balance (Dec) 08.30 -$59.6bn
CA Trade balance (Dec) 08.30 C$4.7bn
US Redbook sls (w/e Feb 10) m/m 08.55 +1.7% last
US ABC consumer conf (w/e Feb 11) 17.00 -1 last
AU Consumer sentiment (Feb) m/m 18.30 +7.3% last
JP Current account (Dec, sa) 18.50 ¥2.02trn
CN CPI (Jan) y/y 21.00 +2.6%
JP Ind prod (Dec, final) m/m 23.30 +0.7%

Latest data Actual Consensus*
IT GDP (Q4, 1st est) q/q +1.1% +0.4%
GB CPI (Jan) y/y +2.7% +2.9%
GB CPI core (Jan) y/y +1.6% +1.8%
GB RPIX (Jan) y/y +3.5% +3.8%
GB RPI (Jan) y/y +4.2% +4.5%
EU GDP (Q4, flash est) q/q +0.9% +0.6%
DE ZEW expectations (Feb) +6.8 +5.0
EU ZEW expectations (Feb) +2.9 +3.0
EU Ind prod (Dec) m/m +1.0% +0.4%
NZ PPI output (Q4) q/q -0.5% +0.7% last
JP Domestic CGPI (Jan) y/y +2.2% +2.4%
CN PPI (Jan) y/y +3.3% +3.0%
JP Consumer confidence (Jan) 48.4 46.3 last
DE GDP (Q4, 1st est) q/q +0.9% +0.6%
FR GDP (Q4, flash est) q/q +0.6/0.7% +0.5%
ES GDP (Q4, 1st est) q/q +1.1% +1.0%
* 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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