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Wednesday May 30, 2007 - 11:10:38 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:35 EDT

Key Points
• Chinese sell-off leads to some modest paring of risk appetites, although how developed markets perform today will be critical for FX.
• Global liquidity and macroeconomic conditions remain reasonably friendly for equity market valuations, for now at least.
• EUR-USD bias remains down.
• Norges Bank policy outcome, ADP employment and FOMC minutes amongst today’s features.

Market Outlook

Chinese equities fell sharply today, with the main indices down almost 7% in response to yesterday’s announcement of a tripling in stamp duty to 0.3% from 0.1%. The moves have weighed on investor risk appetites to a certain degree and this has offered some element of support for both the CHF and the JPY overnight. How far this extends today will depend on the degree of contagion in developed equity markets, although what happens to Chinese and other Asian markets tonight will also be significant. Previous wobbles in the Chinese market have so far come to nothing. It should be noted that in monetary terms the burden of the rise in stamp duty is fairly small and the fallout in other Asian markets has been reasonably limited. Hong Kong fell 0.86%, Singapore was down 0.45% and the Nikkei lost 0.48%, with all bouncing well from the day’s lows. The Korean market eventually closed higher. However, the Chinese authorities do seem intent on bringing the situation under control, so while this latest measure is unlikely to be enough to turn things round, it could be a sign of things to come. An avenue of attack has now been opened and will likely be pursued further.

There is likely to be some further upside testing for the JPY initially today and FX markets in general will be driven by what happens to global equity markets. However, given the solid liquidity backdrop and lack of macroeconomic negatives, the foundations for a possible sustained sell-off in equities do not look convincing just yet. Key supports on EUR-JPY are at 162.20 and 162.60.

The USD has also benefited from the movement overnight, although this remains the bias anyway ahead of Friday’s key data releases, given the generally better tone to US releases and the awkward positional backdrop for the EUR. 1.3340 is still possible ahead of Friday. Having said that, the news out of the US over the past 24 hours has been slightly mixed, with yesterday’s stronger than expected rise in May consumer confidence being partly offset by a poor reading on the weekly ABC consumer comfort measure, which fell to its lowest level since October in response to high gasoline prices. The latter have risen close to record highs in recent weeks, outpacing prior strength in crude prices due to refining constraints. This should be monitored over coming weeks.

There was some temporary support for the EUR this morning following generally hawkish comments from the ECB’s Garganas. He seemed keen to advance the view that it was too early to call a peak in interest rates and that the risks to inflation remained on the upside. He also said that the ECB would probably raise its 2007 inflation forecast in June. Garganas is a known hawk and the comments follow the similar rhetoric advanced yesterday by fellow hawk Weber. None of this should come as any great surprise, as it merely tells us that the hawks are still hawkish. Still, it may also be their way of trying to ensure that the threat of further rate hikes remains in place, even if next week’s ECB statement modifies or drops the
previous reference to policy conditions being accommodative.

Day Ahead
Norway – the Norges Bank is expected to raise rates by a further 25bp and being well discounted, market impact should be limited. A more hawkish message in the statement will be needed to push EUR-NOK below support at 8.0650 and 8.0280.

US – the minutes of the May 9 FOMC meeting are likely to reveal ongoing general dissatisfaction with the elevated inflation backdrop as well as an expectation that growth will recover over coming quarters. In this regard, there are unlikely to be any fresh pointers for the market, where the focus remains firmly on Friday’s ISM and employment data. The ADP employment estimate is also due and while this is not always that well correlated with non-farm payrolls, anything unusual in today’s release is likely to influence sentiment about Friday’s data.

Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 +1.3% last
NO Norges Bank policy outcome 08.00 +25bp
US ADP employment (May) m/m 08.15 +115k
CA Industrial PI (Apr) m/m 08.30 +0.5%
CA Raw materials PI (Apr) m/m 08.30 +0.9%
CA Current account (Q1) 08.30 C$7.0bn
US Minutes of May 9 FOMC 14.00
FR Unemployment rate (Apr) 18.00 8.2%
FR ILO job seekers (Apr) m/m 18.00 -20k
JP Labour cash earnings (Apr) y/y 21.30 +0.1%
JP Overtime earnings (Apr) y/y 21.30 +0.2% last
AU Trade balance (Apr) 21.30 -A$0.8bn
AU Private sector credit (Apr) m/m 21.30 +1.1%
AU Private new capex (Q1) q/q 21.30 +4.0%
NZ Business confidence (May) 23.00 -19.4 last

Latest data Actual Consensus*
US ABC consumer conf (w/e May 27) -13 -9 last
JP Ind prod (Apr, prel) m/m -0.1% +0.5%
AU Retail trade (Apr) m/m +0.1% +0.5%
SE GDP (Q1) q/q +0.6% +0.8%
EU M3 (Apr) y/y +10.4% +10.7%
EU M3 (Apr) 3m y/y +10.4% +10.5%
EU Private sector lending (Apr) y/y +10.3% +10.5% last
NO Unemployment rate (Mar, sa) 2.7% 2.6%
ZA CPI (Apr) y/y +7.0% +6.5%
ZA CPIX (Apr) y/y +6.3% +5.9%
* 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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