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Thursday May 31, 2007 - 11:04:03 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:30 EDT

Key Points
• Stronger global markets fail to seriously undermine CHF or JPY, suggesting possible momentum loss.
• EUR-USD becalmed ahead of key US releases – downside risk remains.
• AUD boosted by strong credit data.
• US GDP, jobless claims, Chicago PMI and Canadian GDP feature today.

Market Outlook

Global equity markets are forging ahead, having firmly shrugged off yesterday’s negative impulse from China, although this has only weighed moderately on currencies like the JPY and the CHF. EUR-JPY has moved away from the lows seen over the past 24 hours, but also remains shy of the recent highs and USD-JPY has also been fairly quiet. Once again there seems to be some evidence of momentum loss in these types of trades, but the truly destructive price action needed to disrupt positioning has not developed as yet. Key supports on EUR-JPY are at 162.60 and 162.20, while USD-JPY support is at 121.10 ahead of 120.80.

The CHF is also receiving some support from the stronger than expected Swiss Q1 GDP data released this morning, although unless it translates into a stronger policy message from the SNB, this in itself will not be enough to reverse current sentiment. Key for EUR-CHF is support at 1.6445. If this breaks, it would be a negative price signal, suggesting initial risk down to 1.6340.

EUR-USD has been quiet, with the market still waiting for tomorrow’s key US releases (ISM and employment report). Risk remains to the downside, although today’s data could influence sentiment slightly (see below for preview).

This morning’s Eurozone data failed to reveal any fresh factors. There was a m/m rise in German unemployment, although this was probably more to do with seasonal distortions than any underlying trend. The seasonal adjustment process adjusts for sharp job losses during the winter months and then subsequently adjusts for the rehiring that typically follows in the spring. However, this year’s mild winter meant that job shedding was not conducted on the same scale (hence the sharp falls in seasonally adjusted unemployment during the Nov-Feb period), so the rehiring that typically follows in the spring (naturally countered by the seasonal adjustment process) has also not materialised. This explains the very small fall in adjusted unemployment in April and today’s reported rise for May. If one averages the unemployment trend over the past eight months it runs out at a rate of -67.5k per month, which seems a more accurate picture of what is really going on. Underlying labour demand should be proceeding fairly well at the current time given the buoyancy in economic activity.

Australian data (private sector credit and capital expenditure) was stronger than expected. The rise in credit growth will be a particular concern to the RBA, as it suggests that the higher interest rates pursued so far have not penalised behaviour that is sensitive to rates. Indeed, the trend growth rate in credit seems to have moved up a notch since the turn of the year. The 3-mth average for the m/m growth rate has stood at 1.2% for the past two months, the first time it has been this high since May/June last year. 0.8270 is the immediate resistance area on AUD and is at some risk today but should hold ahead of tomorrow’s key US releases. 0.8325 is the next resistance above 0.8270.

UK data this morning was mixed, with consumer lending and mortgage approvals edging lower, consumer confidence surprisingly strong and the CBI sales survey showing a steady sales performance in May. Media coverage about the housing market has been more negative over the past week or so, especially with regard to reports about an upturn in buy-to-let investors looking to sell. Today’s mortgage approvals data will supplement that to a certain degree, with seasonally adjusted mortgage approvals from all lenders falling back to 107k, the joint lowest (with April 2006) since September 2005. It is a warning sign, but something lower than 100k or lower will be needed to suggest that demand is starting to fall significantly.

CBI retail sales were well down from the unusually strong pace seen in April, but at +31 the number can hardly be termed as weak. Most surprising of all this morning was the sharp rise in consumer confidence to -2 from -6. Such jumps are rare in what is typically a very stable series, so another month of data will be required before drawing firm conclusions. EUR-GBP has been largely unmoved by the developments.

Day Ahead
US – the 2nd estimate of Q1 GDP will likely be depressed by downgrades to both net exports and inventories, although being for Q1 it may be seen as outdated, especially in view of the more recent signs of improvement in other data. Weekly claims numbers will be viewed with interest after the numbers seen in recent weeks. Last week saw a rebound in claims after several weeks of lower numbers, which had sparked some optimism about the labour market. Chicago PMI is also due today and may influence sentiment about the ISM manufacturing outcome, although the two have not been well correlated over the past three months.

Canada – GDP data for March and Q1 is due today and the Bank of Canada has already indicated that growth was probably around 3.5%, close to the market consensus, so the report should not really add to market thinking. USD-CAD has fallen back this morning and the move below 1.0710 suggests that positive CAD momentum remains intact. A move below the recent low at 1.0686 would suggest a possible extension towards 1.0500.

Data/event EDT Consensus*

ZA Trade balance (Apr) 08.00 -ZAR4.0bn
US GDP (Q1, 2nd est) saar 08.30 +0.8%
US Core PCE prices (Q1) saar 08.30 +2.2%
US Initial claims (w/e May 26) 08.30 310k
US Continuing claims (w/e May 19) 08.30 2529k last
CA GDP (Mar) m/m 08.30 +0.5%
CA GDP (Q1) saar 08.30 +3.6%
US Chicago PMI (May) 09.45 54.0
Latest data Actual Consensus*

Latest data Actual Consensus*
FR Unemployment rate (Apr) 8.2% 8.2%
FR ILO job seekers (Apr) m/m -20k -20k
JP Labour cash earnings (Apr) y/y -0.7% +0.1%
JP Overtime earnings (Apr) y/y +0.7% +0.2% last
AU Trade balance (Apr) -A$962m -A$800m
AU Private sector credit (Apr) m/m +1.2% +1.1%
AU Private new capex (Q1) q/q +9.1% +4.0%
NZ Business confidence (May) -48.2 last -19.4 last
CH GDP (Q1) q/q +0.8% +0.6%
GB N’wide house prices (May) m/m +0.5% +0.6%
FR Consumer confidence (May) -14 -19
DE Unemployment (May) +3k -21k
NO Retail sales (Apr) m/m +0.1% +0.1%
NO Unemployment rate (May, nsa) 1.7% 1.9%
GB Consumer credit (Apr) +£0.5bn +£0.9bn
GB Net lending secured on dwellings (Apr) £8.9bn +£9.7bn
GB Mortgage approvals (Apr, sa) 107k 110k
EU CPI (May, flash est) y/y +1.9% +1.9%
EU Econ sentiment (May) 111.9 111.0
EU Business climate index (May) 1.53 1.61
IT CPI (May, prel) y/y +1.6% +1.5%
GB Consumer confidence (May) -2 -7
GB CBI retail trades survey (May) +31 +44 last
* 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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