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Wednesday June 27, 2007 - 10:32:44 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:10 EDT

Key Points
• Sub-prime mortgage concerns still weighing on global market sentiment.
• JPY correction building up steam – downside risk on EUR-JPY below 164.70.
• EUR-USD could also be dragged lower.
• Focus today will be on key levels for Dow and S&P 500.
• Norges Bank policy meeting, US durable orders also feature.

Market Outlook

Concerns about sub-prime mortgage issues in the US continue to weigh on market sentiment. The concerns are twofold. First of all, the implications this could have for the general provision of liquidity to all markets and second, the concerns about forced liquidations in non-related markets. There is a growing sense that the Bear Stearns issue is merely the tip of the iceberg, although more than anything there is a basic uncertainty about what might happen. Forecasting whether or not systemic risk will turn into something full-blown is not easy. Normally, such events do turn out to be isolated, although the passage of time without recurrent bad news is required to patch up sentiment.

In the meantime there is a risk that such uncertainty translates into further position cutting and this is gathering pace this morning with EUR-JPY moving below 164.70. This is a negative development and holds out the risk of a further pullback in the very short-term. Back above 165.25 is needed to steady the ship today. Potentially, any corrective move could extend as far as 161.50 in the short-term, although it will most likely require further marked losses in equity markets. If such a move does develop it will also likely place downside risk on EUR-USD and any move below 1.3370-80 would cause trouble.

Key will be how North American markets (especially equities) react today. Equity market observers will be looking at possible key technical levels on the S&P 500 (1487) and the Dow (13250). A break of these levels would lead some to conclude that at least a short-term double top is in place for both indices. Note that while much of the concerns about systemic risk relate to the US, this is not necessarily negative for the USD. More than anything it undermines much of the financing behind the flow trends of recent years, which have generally been movements out of US into non-US assets. If this is threatened, liquidation or repatriation pressures will benefit the USD. It is still not clear that this is the big one, as the global macro- economic backdrop remains intact. We would still take the view that interest rates will have to be higher to suggest a clear trend change for global markets.

In the UK, the CBI retail sales survey showed 17% of retailers reporting y/y growth in sales volumes. This is down from the strength of recent months (lowest since November) and is more consistent with the subdued showings in the official sales data over the past two months. Data on unadjusted mortgage approvals by banks was also a little softer, although there will be more interest in the seasonally adjusted data on approvals by all lenders released on Friday. This morning’s data will not be enough to undermine expectations about a rate hike next week. King and other MPC members testify tomorrow.

This morning’s Swiss KoF indicator could have carried extra resonance given the growing concerns about the possibility of a faster pace of SNB tightening. However, the data was uninspiring – a touch below expectations but still exhibiting an upward trend. 1.6560-85 needs to be won back on EUR-CHF to generate some stability, while below 1.6490 would open downside even further towards major support at 1.6410-20.

Day Ahead
Norway – the Norges Bank meet and are likely to announce a further 25bp rate hike (expected by the market). They also release their latest Policy Report where the focus will be on any changes to interest rate projections. Modest upward adjustments are likely, although this is also expected by the market. The report will need to be strong to offset today’s general inclination towards position cutting, which has been placing upward pressure on EUR-NOK.

US – the latest durable orders report is due and the core durable orders numbers should provide further evidence of a recovery in manufacturing. The normal caveats apply with regard to the potential for m/m volatility in this series.

Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 -3.0% last
NO Norges Bank rate outcome & Policy Report 08.00 +25bp
US Durable orders (May) m/m 08.30 -1.0%
US Durables ex-transport (May) m/m 08.30 +0.2%
NZ Current account (Q1) 18.45 -NZ$2.45bn
NZ Current acc as % of GDP (Q1) 18.45 -8.6%
NZ Building permits (May) 18.45 +0.7% last
JP Ind prod (May, prel) m/m 19.50 +0.9%
NZ Business confidence (Jun) 23.00 -48.2 last

Latest data Actual Consensus*
US ABC consumer conf (w/e Jun 24) -12 -9 last
NZ Trade balance (May) NZ$80m NZ$50m
JP Retail sales (May) y/y +0.1% -0.5%
JP Small business confidence (Jun) 48.4 49.3 last
FR Own company ind outlook (Jun) 13 12
FR Business climate indicator (Jun) 110 109
GB BBA mortgage approvals (May) y/y -4.0% +1.0% last
CH KOF indicator (Jun) 1.98 2.00
ZA CPI (May) y/y +6.9% +6.9%
ZA CPIX (May) y/y +6.3% +6.3%
GB CBI retail trades survey (Jun) +17 +31 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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