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Wednesday June 20, 2007 - 10:38:42 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:05 EDT

Key Points
• JPY weakness shows some sign of momentum loss but key EUR-JPY level holds.
• GBP higher after minutes reveal close MPC vote.
• SEK up sharply after Riksbank raises repo rate forecasts.
• NZD probes higher awaiting RBNZ intervention.
• US mortgage applications, Canadian wholesale sales feature today.

Market Outlook

The JPY corrected early on in Europe, with USD-JPY breaking below 123.30 and EUR-JPY testing key near-term support at 165.20-25. However, the latter held and the JPY was quickly sold once again. The price action is suggestive of some momentum loss in the recent move against the JPY, so there is a slight risk of some corrective activity in the short-term. 165.20 on EUR-JPY will hold the key to near-term JPY sentiment. However, any JPY strength is likely to be temporary, with the basic arguments against the JPY firmly intact. Above 165.80 on EUR-JPY would suggest a retest and possible break of the recent highs at 166.10. EUR-USD continues to have room up to the 1.3485-1.3550 area.

GBP firmed after the June 6-7 MPC meeting minutes, which showed a close 5-4 vote in favour of keeping rates unchanged. One of the four voting for a 25bp hike was governor King. Short sterling interest rate futures have not hardened that much on the day, as much was already discounted and rate markets in general have been softer today following the overnight fall in US yields. However, the market will now be looking firmly at the prospect of a hike in July and there may even be speculation about a follow-up move in August, in line with the Inflation Report of that month. In such circumstances, GBP is likely to remain in favour. The tone of tomorrow’s CBI output price expectations number will also be important for GBP.

EUR-SEK fell sharply after the Riksbank raised rates by 25bp and more importantly raised its forecast trajectory for future interest rates to those discounted in the market. The market has now moved to discount an even higher profile, viewing the Riksbank projection as a ‘floor’ scenario. The Riksbank expects the repo rate (currently 3.5%) to average 3.9% in Q4 07 and 4.2% in Q2 08. The news was also accompanied by the latest unemployment data, which showed the unemployment rate falling by more than expected. The news has put a firm top on EUR-SEK at the previous resistance at 9.42-9.45 and downside is now favoured. 9.25 (pivotal in recent times) will need to break to suggest further weakness. Retail sales data is due next Thursday and it was the disappointment surrounding this data last month that was at the source of the recent SEK weakness. It will be significant to see whether such weakness in sales has been temporary.

The NZD has been probing higher overnight, with the market trying to gauge when the next round of RBNZ FX intervention will be forthcoming. This is the problem with intervention – price action is turned into a game between the market and the CB and the RBNZ may be unwilling to take part too extensively. However, having intervened first of all last week around 0.7625, some efforts to protect this level are likely to be seen if necessary. JPY developments could also be significant, as any further corrective move in the JPY make take some of the shine off high-yielding currencies like the NZD. Below 0.7450 is needed to suggest a top on the short-term chart, while 0.7575 has importance for today.

Day Ahead
US – weekly mortgage applications data is the only release of interest out of the US. The recent move higher in bond yields may raise fresh question marks about the state of demand inthe housing market, although oddly enough last week’s mortgage applications data was strong in both ‘purchase’ and ’refinancing’ categories. It seems unlikely that this will continue, but the market will be watching closely.

Canada – wholesale sales data (due today) has been strong in
recent months and for these reasons alone (i.e. statistical noise) there is a risk of a softer number today. However, it would have to be very weak to unhinge expectations of a Bank of Canada rate hike on July 10. Wholesale sales have been fairly well correlated with retail sales ex-autos in recent months, so the tone of today’s data will also affect sentiment about tomorrow’s retail sales report. The CAD was able to shrug off yesterday’s= slightly weaker than expected core CPI number and while positioning is still extended in the CAD’s favour (a possible constraint to USD-CAD downside) CAD sentiment is likely to remain solid ahead of the BoC meeting. Initial support is at the channel line coming in around 1.0610 ahead of the more notable 1.0500-50 area.

Diary
Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 +7.2% last
CA Wholesale sales (Apr) m/m 08.30 +0.5%
CA Leading indicator (May) m/m 08.30 +0.5%
JP Trade balance (May, sa) 19.50 ¥890bn

Latest data Actual Consensus*
US ABC consumer conf (w/e Jun 17) -14 -13 last
JP MoF manu survey (Q2) -2.2 0.1 last
JP MoF all-industry survey (Q2) -0.9 6.2 last
JP All-industry index (Apr) m/m +1.2% +1.2%
DE PPI (May) y/y +1.9% +1.6%
SE Riksbank repo outcome +25bp +25bp
SE Unemployment rate (May, nsa) 3.9% 4.2%
IT Ind orders (Apr) m/m -1.1% -1.0%
GB MPC minutes (Jun 6-7 meeting) 5-4 7-2
GB PSNCR (May) £6.2bn £7.0bn
GB M4 (May) y/y +13.8% +13.4%
GB M4 lending (May) y/y +13.3% +12.9% last
GB BBA mortgage lending (May) +£5.8bn +£5.1bn 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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