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Wednesday March 28, 2007 - 10:43:43 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:05 EDT

Key Points
• Iran rumour helps to push oil prices and the JPY higher.
• EUR-USD still firm after yesterday’s US confidence and house price data, but upside appetite still seems limited.
• Move lower expected unless US news worsens further.
• Bernanke’s testimony and durable orders in focus today.
• UK data disappoints, Eurozone money numbers firm, Swiss KoF improves further.

Market Outlook

A rumour that Iran had struck a US Navy vessel in the Gulf led to a sharp rise in the oil price late yesterday (it spiked up $5 at one point), although the US denied the story. However, oil prices are still over a $1 higher than the levels seen earlier in the US afternoon and the risk-aversion caused by the development has boosted the JPY and weighed on higher yielding currencies like the AUD and the NZD. US equity futures are also down about 0.3% compared to yesterday’s US cash close.

JPY trading today will be significantly influenced by global equity markets and any words from US and UK officials about the latest developments with Iran. The main short-term support area on USD-JPY is at 116.70-117.00, while 156.30 and 229.65 hold initial significance for EUR-JPY and GBP-JPY respectively. Overall, the market is still likely to be looking to sell JPY again going into next week, although this will clearly be dependent upon the performance in equity markets, while Iran and oil prices have now emerged as a sensitive factor in this regard.

The USD was weaker yesterday following a softer than expected consumer confidence report. The overall level of the confidence index remains at a reasonable level, although the expectations component fell to an eight-month low. A report showing softer house prices was probably more significant given ongoing concerns about the sub-prime mortgage market (see chart). The y/y rate moved into negative territory for the first time since Feb 1996, although such developments are not unusual when conditions change so dramatically, as they have done over the past year. However, the market will continue to be jumpy about any negative news on the US housing market.

EUR-USD advanced on the news but has once again failed to push on higher, suggesting some constraints to upside progress, partly because of the positional backdrop. The tone of today’s durable orders data and Bernanke’s testimony will further influence matters (see below for preview). However, we still see little appetite to take EUR-USD that much higher and some very weak news flow out of the US will be needed to prevent a correction lower – key support at 1.3250-60.

Eurozone M3 data this morning was again on the firm side, with the y/y rate on M3 reaching 10% for the first time since February 1990. The y/y rate on private sector lending did ease back a little to +10.3% from +10.6%, although even this is a reasonably impressive performance given that the y/y calculation was up against some very strong m/m rises in lending at the same point last year. Market impact was minimal.

In the UK, Q4 GDP was revised down to +0.7% from +0.8%, while the current account deficit (-£12.7bn, 3.8% of GDP) was the highest since Q2 1990. GBP weakened on the news but has since stabilised. Above 0.6800-10 on EUR-GBP is needed to signal further GBP under-performance. Cable will be driven by USD sentiment, with key short-term support at 1.9555.

The Swiss KoF indicator again exceeded expectations, recording its second successive m/m rise – the rise reported in the previous month was the first since the series appeared to top out in June 2006. A few months of strength will be required for it to be a major positive for the CHF, which was already looking better today due to increased risk aversion. 1.6145-60 is support on EUR-CHF.

Day Ahead
US – Bernanke testifies on the economic outlook today and markets will be looking for further clarificationon the outlook for policy. Bernanke’s semi-annual policy testimony in February included some carefully chosen words about the outlook for housing and inflation that were positive for the equity market, while the recent modification in the FOMC statement also indicates a desire to aid market sentiment. On this basis, more of the same may be seen today, although the Fed will need to be careful not to be seen as turning soft on inflation. Any defence of such credibility may not equate to optimism about the likelihood of near-term rate cuts. Bernanke will also likely be probed about the issue of inflation targeting as well as the subprime mortgage issue.

Overall, his testimony is unlikely to add that much to market intelligence. Last week’s FOMC statement provided few clear pointers about the likelihood of a Fed rate cut, unless there is a more severe downturn in economic activity. This is the essential point – that policy will be determined by how key data variables evolve and the Fed is not sure what will happen in this regard. The observations made about the economy and prices in last week’s statement still suggest a very modest tightening bias. The February durable orders report is also released today and the market will be looking for some clarity after the unevenness of recent months. Durables ex-transport fell 4% in Jan after a 3.2% rise in Dec, although with weaker numbers also seen in Oct and Nov (-1.8% and -0.9% respectively) a stronger number is needed to avert fears of a slowdown in activity. Looking at the chart above the uptrend in core orders has clearly stalled and the situation would become more significant for the Fed if the more stable unfilled orders category (a Fed favourite) were to follow suit. uptrend is stalling

Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 -0.9% last
US Durable orders (Feb) m/m 08.30 +3.5%
US Durables ex-transport (Feb) m/m 08.30 +1.6%
US Bernanke testifies on economy 10.30
NZ Current account (Q4) 18.45 -NZ$4.1bn
JP Retail sales (Feb) y/y 19.50 +0.1%

Latest data Actual Consensus*
US ABC consumer conf (w/e Mar 25) -2 -5 last
GB N’wide house prices (Mar) m/m +0.4% +0.7%
DE Consumer confidence (Apr) 4.4 4.5
SE Retail sales (Feb) m/m +0.4% +1.6%
EU M3 (Feb) y/y +10.0% +9.8%
EU M3 (Feb) 3m y/y +9.9% +9.8%
EU Private sector lending (Feb) y/y +10.3% +10.6% last
GB GDP (Q4, final) q/q +0.7% +0.8%
GB Current account (Q4) -£12.7bn -£10.5bn last
CH KOF indicator (Mar) 1.90 1.83
ZA CPI (Feb) y/y +5.7% +6.0%
ZA CPIX (Feb) y/y +4.9% +5.2%
* 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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