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Thursday July 12, 2007 - 11:01:26 GMT
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Forex Research - Mellon FX Daily – U.S. Edition

Forex Research - Mellon FX Daily – U.S. Edition

Mellon FX Daily – U.S. Edition 6:15 EDT

Key Points
• Weak USD theme persists.
• BoJ meeting and Fukui comments underline low yield backdrop for JPY.
• UK RICS house prices lowest since Jan 06 – BCC business survey strong.
• NZD supported despite weak PMI – tonight’s retail sales data will be significant for short-term trading bias.
• US/Canadian trade data also features today.

Market Outlook

The weaker USD theme has continued overnight and looks set to extend further in the short-term. The recent sub-prime problems have not escalated any further, but there is a sense that such developments will raise concerns over corporate debt issuance, which has been a major source of US current account deficit funding over the past few years. Of course, a lot of these flows will have been hedged, so any loss to the USD would not perhaps be as extreme as some suggest. An important factor will be the impact on other global markets. The fact that such markets have not felt much contagion so far is actually supportive of arguments against the USD. If other markets were affected and there was a disruption to the global flow trends of recent years i.e. moves out of the US into non-US assets, this would be USD positive. The US trade data will no doubt exert an influence today (see below for preview), although it will take some good news to offset current sentiment. A move above 1.3800 would unlock further upside on EUR-USD – immediate support is at 1.3740 ahead of 1.3680-1.3700.

The JPY initially reacted negatively to the revelation that only one BoJ member had voted against the decision to leave rates unchanged. Some in the market had expected that two or three might have voted in favour of a hike, so it was taken as a sign that an August rate hike was slightly less likely. The JPY did manage to bounce back for a while when European trading was fully underway, although Fukui’s subsequent comments at the post-meeting press conference failed to provide any confidence about the possibility of a near-term re-rating in BoJ rate hike expectations.

Once again (as it was in June) Fukui’s key comment was that most members wanted to be more confident about the economic outlook before considering a rate hike. This would appear to reflect some fundamental doubts about where the economy is going and how readily they can pursue their instinctive desire to bring rates back up to more normal levels. The domestic yield case against the JPY remains firmly intact. The bigger doubt relates to how fraught sentiment could become about investor risk appetites. Volatility is likely in such circumstances, but overall the weak JPY trend is likely to remain.

While cable continues to be driven by general USD sentiment, there has been mixed news for GBP. Last night’s UK RICS housing survey for June revealed a sharp fall in the balance of those reporting higher house prices. At the present time, the price balance is not in negative territory but the slowdown is a sign that conditions are changing. The price balance of +10.6% is the lowest since Jan 06 and slowdowns of this nature rarely stop at such levels. Four of the last five slowdowns of this type have seen at least a temporary move into negative territory (see chart) and the exception was the temporary dip in prices seen in Oct and Nov 01, which was probably related to 9/11. It will take more than this to disrupt expectations of a rate hike in the autumn, but the further 25bp hike currently pencilled in by the market for next year is starting to look more contentious. Offsetting this weaker news was an upbeat survey by the British Chambers of Commerce,which reported general strength in sales and orders, especially in manufacturing. Price balances were steady EUR-GBP looks like testing higher - resistance is at 0.6790-0.6800 ahead of 0.6815. There would be upside risk to 0.6840-50 above there.

The NZD recovered late yesterday after NZ finance minister Cullen acknowledged that inflation pressure in the economy remained high. However, the gains were pegged back after a weak PMI survey was released. The reading of 50.4 was the weakest since January 2006. Retail sales due tonight will go a long way in determining the trading bias in the short-term (see below for preview). Key short-term levels on NZD are at 0.7840, ahead of the recent high at 0.7881 and an area running from 0.7715 down to 0.7680.

Day Ahead
US – the monthly trade numbers always carry market-moving potential, but last month’s lower deficit should give the USD some leeway if there is a higher than expected deficit for the latest month. A rebound higher in the deficit would not be surprising given the high oil price backdrop.

New Zealand – retail sales data is out tonight and this will be a big event on a monthly basis now that the market is on the lookout for signs that the household sector is responding to the tighter policy put in place. Ongoing strength in sales will maintain both the high-yield status of the NZD as well asexpectations of a further hike in H2 his year. However, any weakness could see rate sentiment being punctured quite dramatically. Last month (Apr), retail sales fell 1.2% m/m, although this came after rises of 2.3% and 1.0% in Feb and Mar respectively. Another fairly negative number will be required to raise fears about possible consumer retrenchment, although the market may be sensitive to weak data. Evidence of this was apparent earlier in the week when the NZD responded negatively to the reported drop in quarterly business confidence.

Diary
Data/event EDT Consensus*

US Trade balance (May) 08.30 -$60.0bn
US Initial claims (w/e Jul 7) 08.30 315k
US Continuing claims (w/e Jun 30) 08.30 2569k last
CA Trade balance (May) 08.30 C$5.5bn
CA New house prices (May) m/m 08.30 +0.6%
CA Mon Policy Report Update 10.30
US Federal budget (Jun) 14.00 $27.7bn
NZ Retail sales (May) m/m 18.45 +0.5%


Latest data Actual Consensus*

GB RICS house prices (Jun) +10.6% +20%
NZ PMI manu (Jun) 50.4 56.8
AU Employment (Jun) +2.5k +15k
AU Unemployment rate (Jun) 4.3% 4.2%
JP BoJ rate announcement unch unch
JP Ind prod (May, final) m/m -0.3% -0.4%
ES CPI (Jun) y/y +2.4% +2.4%
EU GDP (Q1, final) q/q +0.7% +0.6%

* 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.


 

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