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Thursday April 12, 2007 - 13:22:01 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:15 EDT

Key Points
• EUR-USD consolidating lower after testing $1.3477 in early trading, EUR-JPY holding below ¥161…
• The USD remains largely sidelined, despite relatively hawkish FOMC minutes, Lacker comments.
• ECB meeting key today.

Market Outlook

EUR-JPY extended up to a new record high at ¥160.86 in early European trading, helping the EUR-USD to $1.3477, before some profit-taking set in. Fed Chairman Bernanke, in the Q&A session following his comments on hedge funds, said on Wednesday that the yen is a “free floating currency”, the level of which “is determined by market forces”. That suggests that if the European finance ministers decide to complain about the level of EUR-JPY at this weekend’s G7 they will once again be isolated. There seems little to prevent EUR/JPY clearing ¥161 over the coming sessions, with technical swing targets to the ¥163 zone. The EUR-USD looks on course to challenge $1.35, while EUR-CHF spiked up to 1.6450 briefly overnight, before consolidating back towards 1.6410-1.64. The risk is that this cross drives towards 1.65 and higher.

Nervousness about the ECB meeting also helped to drive the EUR higher. No change is expected this time around but the market is wary of what Trichet may say in the post-meeting press conference. The USD was once again largely sidelined by the EUR and JPY moves, despite the fact that the minutes of the March FOMC meeting were more hawkish than expected. The FOMC discussed raising interest rates if needed, despite cutting a reference to possible rates hikes from the accompanying statement. That had lead many pundits to believe that the Fed might be moving closer to cutting interest rates. In fact, the minutes noted higher than expected core inflation, which the FOMC worried might not moderate as had been hoped. Surprisingly weak business investment and the rise of delinquencies in the sub-prime mortgage market were cited as potential risks to the US growth outlook.

The more hawkish take was underlined by comments from Richmond Fed President Lacker who suggested on Wednesday that further monetary tightening may be needed “if inflation does not moderate”. However, Lacker is something of an arch hawk and is not a voter on the FOMC in 2007.

The AUD-USD tested 0.8270 in Asia session trading but has been relatively flat since then. Risk is on a drive to 0.8500 given the trend and the interest rate outlook. The unemployment rate fell back to 4.5% in March, back to the 31-year low seen in January. Overall employment rose by 10,500, a bit less than expected, but full-time jobs jumped a hefty 31,700 on the month. The AUD-JPY cross rate pushed through ¥98.50 briefly, ability to sustain the break would leave the top of the 12- year range vulnerable to approach just above ¥100.

UK – The BCC quarterly survey showed that the balance of manufacturing firms reporting pressure to raise prices fell to +23, from +39 in Q4 2006, while the services sector prices balance eased to +30, from +36. The manufacturing domestic sales balance fell to +26, down from +31 in Q4 2006 (a 12-year high), while the services equivalent fell to +27, from +34. The export sales and orders balances in manufacturing held roughly steady but the services sector readings deteriorated. However, manufacturing confidence improved with the turnover balance up 4 points at +53, the highest since Q4 1999. The profitability confidence balance also hit a seven year high. The BCC survey is the most comprehensive of those seen in the UK, typically covering over 4,500 entities from the service and manufacturing sectors. The easing back from the very strong report in Q4 should be somewhat reassuring for the BoE and helped the GBP to ease lower but 1.9725 seems to be holding versus the USD. Sustained gains through the 1.9820 region would be needed to set up another run at 2.00.

As expected, the narrowing in the trade deficit seen in January could not be sustained and the February trade gap widened to £6.79bn. Imports from EU countries rose 1% and from non-EU by 1.5%, while exports to the EU rose 0.5% and exports to non- EU countries fell 2%. This suggests that the prospect of a small positive contribution to Q1 GDP from net trade has probably evaporated. Underlying import price inflation rose 0.5% y/y, having previously been in negative territory. Overnight, the RICS reported that March house price inflation unexpectedly rose, with a net 25.5% more surveyors reporting a rise than a fall in house prices, up from a +24.8% in February, well above market expectations of +20%. The level of unsold property fell to its lowest since June 2004, while the ratio of completed sales to stock of available property rose to +47.8%, up from +46.9%, the highest in nearly three years.

Day Ahead
Eurozone – The ECB meeting is likely to be uneventful with rates having been raised last month. Trichet’s comments will be closely watched to see whether any sentiments are expressed about the likely peak in ECB rates, although he is unlikely to reveal any fresh information.

New Zealand – retail sales are due and have shown no signs of flagging in recent months. The RBNZ has stated that there needs to be evidence of moderation in domestic demand to avert the risk of further policy tightening, so strong or weak data could have some impact on the NZD.

Data/event EDT Consensus*

EU ECB meeting outcome 12.45, press conf 08.30 unch
US Import prices (Mar, nsa) y/y 08.30 +1.3% last
US Imp prices ex-petrol (Mar, nsa) y/y 08.30 +2.1% last
US Initial claims (w/e Apr 7) 08.30 320k
US Continuing claims (w/e Mar 31) 08.30 2492k last
CA New house prices (Feb) m/m 08.30 +0.3%
ZA SARB repo announcement 09.20 unch
NZ Retail sales (Feb) m/m 18.45 +0.5% last

Latest data Actual Consensus*
GB RICS house prices (Mar) +25.5% +24% last
JP Domestic CGPI (Mar) y/y +2.0% +1.9%
JP Dom CGPI – final goods (Mar) y/y 0.0% -0.4% last
US Fed’s Moskow on econ outlook
AU Employment (Mar) +10.5k +15k
AU Unemployment rate (Mar) 4.5% 4.6%
SE CPI (Mar) y/y +1.9% +2.0%
SE CPI UND1X (Mar) y/y +1.2% +1.3%
SE AMS Unemp rate (Mar, nsa) 4.0% 4.0%
IT Ind prod (Feb) m/m -0.5% +0.6%
GB Global trade balance (Feb) -£6.8bn -£6.4bn
GB Non-EU trade balance (Feb) -£4.07bn -£3.9bn
GB BCC econ survey (Q1)
* 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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