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Monday March 5, 2007 - 11:16:49 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:05 EST

Key Points
• More of the same overnight, with equities weaker, the JPY stronger and high-yielders getting hit.
• The USD is benefiting from position closing and possible outflows from emerging markets.
• Further volatility likely today – next level on USDJPY at 114.44 (Dec low).
• US non-manufacturing ISM features today.

Market Outlook

D A turbulent overnight session, with equity markets weakening sharply and the JPY jumping higher in Asia. The Nikkei fell 3.3%, responding to the weaker close in the US on Friday and the Dow future is a further 120 points down from the US close. Most European indices are down around 2% on the day and such a backdrop of global instability is likely to mean further upward pressure for the JPY and the CHF in the short-term and more woes for the high-yielders. The situation should eventually stabilise and when it does, a return to JPY weakness should be seen, but it is unclear how long this will take and how far the JPY appreciates in the short-term.

There is some potential support coming up, most notably on USD-JPY at the Dec low of 114.44. However, with this level so close already and a whole week of trading lying ahead, a move below this level seems likely. 113.00-50 is the next support below there.

Apart from against the JPY and the CHF, the USD is benefiting against most other currencies. There are two reasons for this. 1) the market has typically been short of the USD against most currencies and these positions are now being squeezed given the reining in of risk appetite in general, and 2) any liquidation of emerging market positions will tend to benefit the USD via a flow back to the USD investor base.

Latest IMM positioning data showed that as of last Tuesday net spec longs on EUR-USD had risen to another record high of 102,598 contracts, up from the 99,326 old record seen the previous week. Net spec longs on USD-JPY stood at 114,626 contracts as of last Tuesday, down only marginally from the 116,195 number seen the previous Tuesday. Of course, there has been much in the way of price action since last Tuesday, so it would be wrong to assume that such positioning remains in place, especially on the JPY. However, it does demonstrate the vulnerability of the market from a positional perspective and EUR-USD looks like retaining a downside bias for now.

Eurozone PMI services numbers this morning were fairly solid, although the UK version was weaker than expected. The UK PMI services eased back to 57.4 (weakest since September) from 59.2 the previous month, having spent the last four months above 59.0. This is significant as the data has been a factor behind the recent MPC tightening. Such strength has made the MPC more comfortable about the growth backdrop when considering rate increases aimed at snuffing out potential inflation risks. This data will strengthen the hand of those on the MPC who want to wait and see how things pan out. GBP (as one of the more high-yielding currencies) had been underperforming anyway overnight before this data was released. The worst is probably not over for GBP if global market instability continues, but there is clearly much room for intra-day volatility in both directions. Support at EUR-GBP is now at last week’s breakout point of 0.6760 and this should hold for now. There is some downside risk on cable while below 1.9260. Initial support at 1.9145-90.

Day Ahead
US – the ISM for non-manufacturing features in the US and this has held in well in recent months, with the latest reading for January of 59.0 being the strongest since last May.

Data/event EDT Consensus*

US ISM non-manu (Feb) 10.00 57.3
CA PMI (Feb, nsa) 10.00 55.0
US Fed’s Poole on inflation and growth 11.00
US Fed’s Warsh on liquidity & growth 14.00
AU Trade balance (Jan) 19.30 -A$1.1bn
AU Building approvals (Jan) m/m 19.30 +0.5%

Latest data Actual Consensus*
JP Capital spending (Q4) y/y +16.8% +13.7%
IT PMI services (Feb) 56.2 55.6
FR PMI services (Feb) 58.9 58.5
DE PMI services (Feb) 57.2 57.9
EU PMI services (Feb) 57.5 57.6
GB PMI services (Feb) 57.4 59.0
* 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


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