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Friday May 25, 2007 - 10:49:28 GMT
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Forex Resarch - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:15 EDT

Key Points
• EUR-USD downside still favoured ahead of next week’s key US releases.
• Yesterday’s durable orders data supplements improving evidence about manufacturing – stronger new home sales more difficult to read.
• Choppy night for JPY as initial strength is reversed
– EUR-CHF carrying some downside risk for today.
• Equity market performance will be important for CHF and JPY today, although it seems unlikely that global market optimism will be punctured just yet.
• US existing homes sales feature today.

Market Outlook

Taking a look at current spot rates, one could easily believe that last night was another very quiet session. However, there has been a certain amount of volatility in the JPY crosses, with EUR-JPY sinking as low as 162.20 at one point and USD-JPY briefly touching 120.85. The reason for this was the early weakness in Asian equity markets following the declines seen in the US. Most Asian equity indices closed down on the day (apart from China) but most are also well off the lows seen earlier in the Asian session, when the JPY was jumping higher. Japanese CPI data was in line with expectations.

The ability of the JPY crosses to rebound will be taken as a sign of underlying strength. More volatility looks likely today and key will be the performance of equity markets. However, a more negative fundamental trigger is required to truly quash global market sentiment at the current time, with markets still very well supported by the favourable liquidity backdrop.

EUR-USD remains subdued, although downside continues to develop in a pedestrian manner. Yesterday’s US data was a real mixed bag. The good news was the further recovery in core durable orders measures, consistent with the tentative evidence seen elsewhere about a potential recovery in manufacturing. Whether this receives further confirmation in next week’s ISM manufacturing survey will be a key factor for Fed policy sentiment and the USD in the short-term. There is still risk to 1.3340 on EUR-USD before that data is released next week.

More disappointing yesterday was the rise in continuing Claims for the week ending May 12. A low print for total claims for that particular week (survey week for payrolls) would have opened an avenue of speculation about the possibility of strong number in next week’s employment report. The new home sales numbers looked reasonably good but further evidence is needed before firm conclusions can be drawn. On the face of it the sharp rise in sales and big fall in the median home price would appear to suggest that builders are slashing prices to clear stock. Not good for builders profits but helpful for an eventual recovery in the residential construction sector. However, much of the 16.2% rise in total home sales was driven by strength in the South (+27.8%) and that particular region tends to have lower-priced homes. It is perhaps of no great surprise then that the median price of the homes that were actually sold in April fell so dramatically. One positive way of looking at the numbers is to say that the magnitude of the rebound in sales in April suggests that the weakness in Q1 was exaggerated, but more evidence is required. Existing home sales are due today (see below).

The SNB has been raising the rhetoric this week in arguing against CHF weakness, although it is clear that they do not currently feel in a position to do anything tangible (faster pace of tightening, intervention) to address the situation. Today’s KoF indicator was broadly in line with expectations and clearly not enough to shake the market from its current belief of 25bp moves every quarter for the rest of this year. Whether the current pullback in equity markets extends any further today will perhaps be more significant for the CHF. EUR-CHF will carry downside risk as long as it stays below 1.6507, while upward impetus will not be reintroduced unless 1.6530-36 breaks. Downside is favoured today, with a break of 1.6475 likely to target 1.6445-50, although such CHF strength could prove temporary. CHF weakness would quickly return on any stabilisation in global markets.

Day Ahead
US – existing home sales data is due today and the market will be looking for further evidence about a possible stabilisation in housing. Yesterday’s new home sales strength was constructive in this regard, but as noted above, the data remains highly volatile. The existing home sales measure fell 8.4% in March to the lowest level seen since June 2003, so basic statistical risk would suggest the likelihood of a rebound today and possibly a sharp one.

Data/event EDT Consensus*

DE CPI (May, prel) m/m from today +0.2%
US Existing home sales (Apr) 10.00 6.10m

Latest data Actual Consensus*
JP CPI Tokyo ex-fresh food (May) y/y 0.0% 0.0%
JP CPI Nat ex-fresh food (Apr) y/y -0.1% -0.1%
JP CPI Nat ex-food & energy (Apr) y/y -0.2% -0.4% last
DE Import prices (Apr) y/y +0.5% 0.0%
DE Consumer confidence (Jun) 7.3 6.0
FR H’hold consumption (Apr) m/m -0.3% +0.2%
SE Trade balance (Apr) SEK11.9bn SEK12.3bn
GB GDP (Q1, 2nd est) q/q +0.7% +0.7%
GB Services index (3mths to Mar) q/q +0.8% +0.8%
CH KOF indicator (May) 1.96 1.95
* Consensus unless stated

©2007, 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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