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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:15 EDT

Key Points
• Poor Japanese economic numbers leave JPY vulnerable.
• EUR and GBP up against the USD in Europe – today’s US data will determine whether recent corrective tone resurfaces.
• High-yielders such as the NZD and the AUD should eventually re-strengthen, but some corrective risk remains in place.
• US GDP, employment cost index and Michigan sentiment feature today.

Market Outlook

A poor set of economic numbers out of Japan overnight and this will raise the threat of more JPY weakness in the short-term. Key CPI measures (excluding fresh foods and excluding food and energy) both came in weaker than expected (see Diary box) while consumer spending also fell back from last month. The latter is still well off the lows of last year, but it can hardly be described as strong. The developments in CPI are worrying and will raise doubts over whether key y/y rates will bounce back in the short-term.

The BoJ is putting a brave face on it by declaring, after today’s meeting, that the economy was still on track to deliver expansion and a normalisation in prices. They forecast core CPI (ex-fresh foods) at +0.1% for the year ending Mar 08 and +0.5% for the year ending Mar 09. However, ultimately this is not a suitable backdrop for the building of rate hike expectations and in such an environment the JPY will remain extremely vulnerable. More broad based JPY weakness looks likely over the coming week or so.

With the exception of the JPY, some corrective pressure has developed over the past couple of days, although this is mainly related to an adjustment in short USD positioning. The lack of momentum to take out the old highs on EUR-USD has led to some trimming of positioning, but both EUR-USD and GBPUSD have bounced back this morning and moves above 1.3630 and 1.9955 respectively would put them on a more positive footing. The tone of today’s US GDP data will carry significance as to whether the corrective tone resurfaces. 1.3585 is the immediate support level of interest on EUR-USD and any move below there would leave risk down to 1.3540 ahead of the main short-term support area at 1.3460-1.3500. 1.9865 and 1.9820 are supports on cable.

Another sign of the corrective pressure currently in place is in the fact that both the AUD and NZD have remained subdued against the USD overnight – unusual when the low-yielding JPY suffers bad economic news. This too could extend further in the short-term, although strength should eventually return given that high-yielding positives remain in place. Note that while the rate spread for the AUD over the USD remains very positive in the AUD’s favour, the spread on rate expectations is well off recent highs – see chart. 0.8150 is possible on the AUD, with NZD having risk to 0.7250, although whether such corrective risk materialises will also depend upon the USD in general and the tone of today’s data.

Day Ahead
US – the first estimate of Q1 GDP, the Q1 employment cost index and the final Michigan sentiment number for April are due. The market is looking for another subdued reading on GDP of +1.8% (on an q/q annualised basis) with weakness in investment expenditure (especially residential) likely to be the main factor once again. Residential investment has taken 1.2% off the GDP growth rate in each of the past two quarters. Q1 employment costs will be watched closely for evidence of inflation pressure in the labour market. A 1% q/q rise in Q3 caused some concern at the time, but was not built upon in Q4, with the q/q rate falling back to +0.8%. The mid-month estimate for Michigan sentiment was down from March and the market will be keen to see whether this has extended any further.

Data/event EDT Consensus*

US GDP (Q1, 1st est) saar 08.30 +1.8%
US Core PCE prices (Q1, 1st est) saar 08.30 +1.8% last
US Employment cost index (Q1) q/q 08.30 +0.9%
DE State CPIs (Apr, prel) m/m today +0.2%
US Michigan sentiment (Apr, fin) 10.00 85.3

Latest data Actual Consensus*
FR Unemployment rate (Mar) 8.3% 8.4%
FR ILO job seekers (Mar) m/m -34k -19k
JP CPI Tokyo ex-fresh food (Apr) y/y 0.0% 0.0%
JP CPI Nat ex-fresh food (Mar) y/y -0.3% -0.2%
JP CPI Nat ex-food & energy (Mar) y/y -0.4% -0.3% last
JP Unemployment rate (Mar) 4.0% 4.0%
JP Job-to-applicants ratio (Mar) 1.03 1.05
JP Overall PCE (Mar) m/m -0.8% +0.2% last
JP Overall PCE (Mar) y/y +0.1% +0.7%
JP Retail sales (Mar) y/y -0.7% -0.4%
JP Ind prod (Mar, prel) m/m -0.6% +1.0%
JP BoJ policy outcome unch unch
JP Housing starts (Mar) y/y +5.5% -0.9%
FR Consumer confidence (Apr) -20 -21
IT Business confidence (Apr) 98.2 94.5
SE Retail sales (Mar) m/m +1.4% +0.8%
CH KOF indicator (Apr) 1.90 2.00
* 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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