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Forex Research - Mellon FX Daily - U.S. Edition
Mellon FX Daily 06:30 EDT
â€˘ Yields steadier but strong US data means that hawkish tone will remain.
â€˘ Downside bias on EUR-USD while below 1.3330-40.
â€˘ USD-JPY new highs suggest likelihood of further short-term gains.
â€˘ SNB raises by 25bp.
â€˘ US PPI todayâ€™s main feature.
Yesterdayâ€™s price action was the first sign of a short-term bottom having been reached in the bond market, with yields failing to rise any further despite a very robust retail sales report. However, a major rally looks unlikely, as such data strength will mean the continuation of a more hawkish tone in the money market. The better stability in global markets has stopped the USD strengthening much further against the EUR and GBP, but an upside USD bias will remain in place in the short-term, especially against the EUR. A close back above 1.3330-40 is needed to turn that bias around on EUR-USD. In the meantime there is risk down to 1.31. The most significant FX price action yesterday came on USD-JPY, which reached a fresh 4 Â˝ year high. This leaves upside risk in the short-term, with a move up towards 124.50 looking likely.
RBA governor Stevens
downplayed speculation about the likelihood of an immediate hike in interest rates, although he made it clear that a tightening bias is in place. He said "on the one hand, the medium-term concerns about inflation remain, and that is cause enough to err on the cautious side in setting policy, and to ask whether current settings are restrictive enough." However, he added "on the other hand, the somewhat lower short-term inflation outlook means that the starting point for a future pick-up in inflation is likely to be a bit lower than earlier thought and this has afforded some additional time in which to assess trends in demand and the economy's capacity to meet them." It would appear that the RBA will be content to leave rates unchanged at its July meeting and attention will now be on the Q2 CPI data to be released on July 25. Given the strength in most other releases, the CPI numbers will have to remain subdued to avert the need for a rate hike in August. While the AUD will retain good medium-term arguments, short-term momentum is in danger of fading and this would be confirmed if 0.8350 breaks.
The Swiss National Bank
raised rates by 25bp, as the market had expected and advanced a fairly hawkish statement, including the following conclusion. â€śShould economic momentum remain unchanged or should movements in the Swiss franc result in a further relaxation in monetary conditions, further increases in the interest rate are likely in the months aheadâ€ť. However, if there is a veiled threat here that the pace and extent of rate hikes might exceed the 25bp per quarter currently discounted by the market, the SNB will need to make it more explicit for there to be any tangible impact on the CHF. EUR-CHF tested higher after the statement, but has since pulled back from the highs and a close above 1.6600 is required to suggest enthusiasm for further short-term upside. Below 1.6520 would suggest a pullback.
â€“ core PPI has been soft over the past two months (zero m/m in both Mar and Apr) so a very strong number will be required today to stir up any inflation fears. CPI is due tomorrow.
Data/event EDT Consensus*
US PPI (May) m/m 08.30 +0.5%
US PPI core (May) m/m 08.30 +0.2%
US Initial claims (w/e Jun 9) 08.30 312k
US Continuing claims (w/e Jun 2) 08.30 2535k last
NZ Manufacturing activity (Q1) q/q 18.45 -2.2% last
JP Tertiary index (Apr) m/m 19.50 +1.5%
JP BoJ rate announcement unch
JP BoJ monthly report 02.00
Latest data Actual Consensus*
NZ Retail sales (Apr) m/m -1.2% 0.0%
GB RICS house price balance (May) 23.9% 25%
NZ PMI manu (May) 56.8 54.4R last
CH SNB rate announcement +25bp +25bp
GB Retail sales (May) m/m +0.4% +0.3%
EU CPI (May) y/y +1.9% +1.9%
EU CPI ex-energy/fresh food (May) y/y +1.9% +1.9%
* Consensus unless stated
Â©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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