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Forex Research - Mellon FX Daily - U.S. Edition
Mellon FX Daily 06:10 EDT
â€¢ EUR-USD downside risk remains.
â€¢ Global liquidity is alive and well â€“ higher real interest rates are needed.
â€¢ ZEW numbers strong but fail to tell the market anything new.
â€¢ Fedâ€™s Lacker speaks on inflation.
attempted to stabilise in early European trading (perhaps aided by some apprehension about the possibility of a strong ZEW survey), although this did not last. The ZEW numbers were strong enough but they did not tell the market anything new and EUR-USD downside remains favoured. There are no major releases today, although the Fedâ€™s Lacker speaks (see below). The 1.3440 level on EUR-USD has just about held for now, but downside remains favoured in the short-term to 1.3340. Above 1.3500 is required to introduce a sense of stability, while any move through 1.3530-45 would be a more positive sign. The ability of the USD index to make it above 82.60 (yesterdayâ€™s high was 82.51) will also be significant.
numbers managed to recover further after the weakness seen in the second half of last year, when respondents were showing concern about 1) the possible negative impact of the German VAT hike and 2) the general ability of the German and Eurozone economies to sustain such strong growth. As it turns out, such fears have not been warranted thus far and the realisation of this favourable outcome has been allowing expectations to improve.
remains steady, with buoyant global markets and investor risk appetites the main factor supporting broadly negative JPY sentiment. The inability of a number of JPY crosses to push on through recent highs does raise some questions about whether current momentum is fading and the risk of some initial corrective activity. However, the increasing focus on China (and other official entities) as a fresh source of global market liquidity will continue to support global market sentiment for the time being and this could mean more eventual difficulties for the JPY, unless there is a sudden recovery in BoJ policy expectations.
Much of the focus on the build-up in FX reserves in recent years has been on the implications for reserve diversification, although there is also a basic liquidity issue. The pool of global liquidity
that has been absorbed by official entities has grown dramatically in recent years (see chart) and more of this is likely to be recycled back into private sector asset markets. On this basis the global liquidity machine is alive and well and will most likely require a much higher level of global real interest rates.
â€“ Richmond Fed president Lacker speaks on inflation today and it will be interesting to see whether he has changed his tune in any way since the comments he made in early April. At that time, he said he was still uncomfortable with the core CPI backdrop and that if it did not moderate, additional policy firming may be needed.
Data/event EDT Consensus*
US Chain store sls (w/e May 19) w/w 07.45 +0.8% last
US Redbook sls (w/e May 19) m/m 08.55 +2.5% last
US ABC consumer conf (w/e May 20) 17.00 -7 last
US Fedâ€™s Lacker on inflation outlook 19.30
JP All-industry index (Mar) m/m 19.50 -1.3%
Latest data Actual Consensus*
IT Consumer confidence (May) 109.5 108.8
DE ZEW expectations (May) 24.0 23.0
EU ZEW expectations (May) 22.3 15.0
EU Trade balance (Mar, sa) â‚¬5.1bn â‚¬0.5bn
* 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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