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Forex Research - Mellon FX Daily - U.S. Edition
Mellon FX Daily 06:00 EDT
â€¢ USD-JPY up as US data fails to disappoint.
â€¢ Markets may remain wary with further key US releases due for this week.
â€¢ Weak US data will be needed to prevent a further pullback in EUR-USD ahead of weekend.
â€¢ US pending home sales features today, RBA rate announcement tonight.
has weakened overnight with most JPY crosses moving higher, although this increasingly turned into independent USD strength as the European morning progressed. USD-JPY retained its gains while the EUR, GBP and even the AUD and the NZD slipped lower against the USD. The passing of yesterdayâ€™s US ISM number without a fresh disaster has been a contributory factor to these movements, while global markets have also been aided by oil prices falling away from recent highs due to growing optimism about a settlement of the current dispute between the UK and Iran.
report was not exactly strong, but by staying above 50.0 it is painting a picture of activity that is clearly not weak enough to alarm global markets or to trigger any immediate Fed easing expectations. The strength in the prices paid component was a reminder of the inflationary backdrop, although in truth this number is volatile and reflects m/m swings in raw materials prices. The ISM does not have a category for â€˜prices receivedâ€™.
However, markets are likely to remain slightly cautious this week with the non-manufacturing ISM and the employment report still to come. Any negative news from these items would still have the capacity to fuel fears about the US economy.
The problem for EUR-USD
is that sizeable long positioning has already been built up and if not supported by weaker US data (yesterday was a chance missed in this regard) there is a risk of some liquidation ahead of the weekend, especially with many in the market likely to be away when Fridayâ€™s payrolls data is released.
If the rest of the weekâ€™s US data does turn out to be reasonably solid, this should be negative for the JPY and positive for global markets, high-yielders and the USD.
- pending home sales have been fairly soft in recent months apart from a brief upward spike in December, but at least the series has stabilised after the heavy falls seen between Q305 and Q306. Some strength will be needed to add credibility to the recent rise in existing home sales.
â€“ this eveningâ€™s RBA decision has become an increasingly close call. Recent data suggests that the tightening conducted so far has not had a major impact on spending, debt appetite or activity in general and a rate rise this month or next now looks a certainty. Waiting until next month would give the RBA a chance to assess the Q1 CPI data released on April 24, but the strong retail sales data earlier this week may convince them to tighten immediately. They could certainly rationalise a tightening as early as this week. An additional, albeit secondary, consideration may be whether they want to add further fuel to the fire under the AUD after the recent break above 0.80. If they do raise rates tonight the AUD is likely to test and possibly break the 0.8214 high from Dec 1996. A failure to move would instigate a pullback towards 0.8100, although unchanged rates should not detract from AUD optimism too much. Expectations for a May rate hike would remain firmly in place and the risk of hedging demand for AUD is high with 0.80 having been broken.
Data/event EDT Consensus*
US Chain store sls (w/e Mar 31) w/w 07.45 +0.2% last
US Redbook sls (w/e Mar 31) m/m 08.55 +0.7% last
TR CPI (Mar) y/y 09.30 +10.9%
US Pending home sales (Feb) m/m 10.00 -0.5%
US ABC consumer conf (w/e Apr 1) 17.00 -2 last
AU RBA rate announcement 19.30 mkt split unch/+25bp
Latest data Actual Consensus*
JP Monetary base (Mar) y/y -19.1% -19.7%
AU Trade balance (Feb) -A$0.8bn -A$1.1bn
CH CPI (Mar) y/y +0.2% +0.2%
EU PPI (Feb) y/y +2.9% +2.8%
* Consensus unless stated
ï›™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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