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Tuesday June 12, 2007 - 10:29:01 GMT
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Forex Research- Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:06 EDT

Key Points
• Hawkish sounding King adds some detail to MPC thinking, but market rate expectations already high.
• Cable gains pegged back by softer CPI.
• EUR-USD struggling to bounce ahead of key support.
• FX market essentially wants to see this week’s key US data and how global markets respond.
• NZD creeping higher – more RBNZ intervention anticipated.
• SEK receives a further blow from weak CPI number.

Market Outlook

GBP was strong early on following the hawkish stance adopted by BoE governor King in a speech delivered after yesterday’s European close. However, some of these gains were given up after the release of a weaker than expected set of CPI numbers.

King’s comments came across as hawkish, but the UK money market is already embracing a very hawkish picture and this was not really advanced any further. Indeed, he was essentially making good on his promise to improve communications about MPC policy intentions, highlighting the key developments required to avoid further rate rises this year. Slower domestic demand and a reduced willingness to raise prices by the business sector were the two central points. General economic activity indicators and retail sales will therefore command high importance over coming months, as will (to a lesser degree) the housing market. The MPC has always been a little skeptical about the extent of the relationship between housing and consumer spending. The CBI and PMI survey categories relating to ‘output price expectations’ and ‘prices charged’ will also be key. The focus on this type of price indicator shows that the MPC is primarily focused on medium-term core inflation pressures rather than what is happening in the short-term to final consumer prices.

However, it was the CPI data this morning that brought GBP back down to earth. The headline CPI eased further to +2.5% from +2.8% (mkt had expected +2.6%), with the negative base effects from food and utility prices pushing the y/y rate lower. The core CPI rate moved back up to +1.9% from +1.8%, but even this was due to an erratic item (big leap in air fares) so overall the data is slightly more comforting. The data will2 support MPC beliefs about a further pullback in CPI during the remainder of 2007 and along with yesterday’s steady PPI output number is another hurdle overcome with regard to potential inflation scares (average earnings is due tomorrow). However, as noted by King above, the MPC will need to see moderation in other indicators of medium-term core inflation pressure before declaring comfort on the outlook for CPI. The general USD tone will be significant for cable in the short-term.

EUR-USD was helped by cable initially, although such a move looks fragile. The bounces seen so far in EUR-USD have not been impressive and markets will want to see this week’s key economic releases in the US (retail sales Wednesday, PPI Thursday and CPI Friday) and how bond and equity markets respond to them before taking a fresh view on the majors. Any negative instability in global markets would flush out short USD positioning even further. Key support on EUR-USD is the 100- day moving average at 1.3330.

The NZD has been attempting to creep higher overnight, although the market is viewing the possibility of more RBNZ intervention. It has not been forthcoming yet, although having cast the initial stone it would be unusual if they were to allow the NZD to threaten the levels seen during yesterday’s intervention without responding further. The initial intervention yesterday came in around 0.7625 and according to most reports a second round was seen just below 0.7560. 0.7550-60 looks like being the first big resistance area on the NZD. A point of interest will be what happens if markets outside NZ time test key levels. Will this trigger any intervention, either directly or via another central bank as agent? Retail sales data due tomorrow night will also be significant for the NZD.

Weaker than expected Swedish CPI inflicted another blow to SEK sentiment, which has already been damaged in recent weeks by disappointing retail sales and GDP data. Given the fine balance of opinion on the Riksbank board, these latest developments would appear to shift the balance of argument in favour of the doves ahead of next week’s meeting and Monetary Policy Report. However, that Report may yet prescribe a higher trajectory for future rate moves, so all is not lost for the SEK. Also note that the retail sales number (a highly volatile series) could easily restrengthen next month, while today’s CPI was affected by erratic items such as electricity and tomato prices (each taking 0.1% off the outcome). 9.42-9.45 is the next resistance area on EUR-SEK ahead of 9.50. EUR-SEK should hold this area before heading back towards 9.25.

Data/event EDT Consensus*

US Chain store sls (w/e Jun 9) w/w 07.45 -0.5% last
US Redbook sls (w/e Jun 9) m/m 08.55 +2.1% last
US Federal budget (May) 14.00 -$61bn
US ABC consumer conf (w/e Jun 10) 17.00 -15 last
JP Current account (Apr, sa) 19.50 ¥1.95trn
AU Consumer sentiment (Jun) m/m 20.30 +7.5% last
AU New home sales (Apr) m/m n/a 0.0% last
CN Retail sales (May) y/y 22.00 +3.3%
JP Ind prod (Apr, final) m/m 00.30 -0.1%

Latest data Actual Consensus*
JP Domestic CGPI (May) y/y +2.2% +2.0%
JP Dom CGPI finished gds (May) y/y +0.2% 0.0%R last
AU Business confidence (May) +15 +13 last
CN CPI (May) y/y +3.4% +3.3%
JP Consumer confidence (May) 47.4 47.8
SE CPI (May) y/y +1.7% +2.0%
SE CPI UND1X (May) y/y +0.9% +1.2%
GB CPI (May) y/y +2.5% +2.6%
GB CPI core (May) y/y +1.9% +1.8%
GB RPIX (May) y/y +3.3% +3.3%
GB RPI (May) y/y +4.3% +4.3%
GB Global trade balance (Apr) -£6.3bn -£7.0bn
GB Non-EU trade balance (Apr) -£3.9bn -£4.0bn
EU Ind prod (Apr) m/m -0.8% +0.2%
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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