Published: Sep. 20 2006, 13:37 GMT

FOMC... the End of Tightening

In front of today??™s critical FOMC rate decision the market is forced to adjust due to event driven risk.

MAJOR HEADLINES ??“ PREVIOUS SESSION
??? Swiss GDP (2Q F) 1.3% vs. 1.4% exp., yoy 5.1% vs. 5.2% exp.
??? UK BoE votes 8-0 to hold rates.
??? US MBA Mortgage Applications
??? CA Leading Indicators (Aug) mom 0.2% vs. 0.2%
??? CA Wholesales Sales (Jul) mom 2.1% vs. 0.6% exp.
??? The Thai Kings endores Army Chief Sonhi who lays the ground work for transition

FROM THE MORNINGS UPDATE
??? GE ZEW Survey (Econ Sentiment) Sept -22.2 vs. -8.0 exp. ??
??? EC ZEW Surevy (Econ Sentiment) 10.2 vs. -4.0 exp
??? GE Zew Survey (Current Situation) 38.9 vs. 35.0 exp.
??? CA Consumer Prices (Aug) mom 0.2% vs. 0.1% exp.
??? CA CPI Excluding core mom 0.2% vs 0.2% exp.
??? US Producer Price Index (Aug) mom 0.1% vs. 0.3% exp.
??? US PPI Ex food & enegy mom -0.4% vs 0.2% exp.
??? US Housing Starts (Aug) 1665K vs. 1746K exp
??? US building Permits (Aug) 1722K vs. 1730K exp.
??? US ABC Consumer Confidence out at -15 vs. -13 previously.
??? Australian Westpac Leading Index (July) rising to 0.8%.
??? Australian DEWR Skilled Vacancies MoM (Sep) out at -0.1% vs. -3.2% previously
??? Hungary protests continue for a second straight night
??? Thailand see a military coup
??? Iran and US go head-to-head at the UN


THEMES TO WATCH ??“ UPCOMING SESSION
USD
Markets will be focused on today??™s important FOMC meeting (while keeping an eye on geopolitical events). This meeting could finally signal the end of the almost 3 year tightening cycle. We are in agreement with the market that the Fed will hold rates at 5.25%, with a bias towards a dovish tone to the critical accompanying statement. The US economy has performed as the Fed has anticipated, with growth slowing and inflation levels tapering. In this scenario the Fed will most probability take a wait and see approach. The real question will be how the market will react to interest rate support now clearly off the table. Recent USD strength suggests markets are trading on other variables since this outcome (if correct) has already been well established. However, there is significant risk USD bulls have just been overly optimistic and today??™s dovish comments could trigger a USD decline.

NZD
The Kiwi could face its ???moment of realization??™ this evening, with the release of Current Account deficit figure ( exp. -2.731b). There is a high probability that the volatile reading comes in higher then expected. The massive NZD sell-off in Feb06 caused by the larger then expected trade figures (-935.50 vs -402.00 exp) is still fresh in our mind and we believe tonight could provide a similar trigger. In addition the verbal trashing the NZD received last night might have help loosen the NZD bull??™s conviction. We are very bearish on the NZD and have shorted just about everything NZD.

FROM THE MORNINGS UPDATE
??? SW GDP
??? UK BoE Minutes
??? CA Leading Indicators, Wholesale Sales
??? US FOMC
??? NZ Current Account Balance

THB
In a move out of antiquity but still popular in emerging markets, Thailand??™s Army Chief Boonyarataklin led a military coup, overthrowing PM Shinawatra caretaker government while he and inter circle were aboard. USDTHB rocking to 38.00 form 37.30 lvls but retraced to 37.80 in Asian trading. Currently the market is monitoring developments very closely still waiting to make a value judgment on the overall effect this coup will have on Thailand. In addition, Standard & Poor's may cut Thailand's BBB+ credit rating, after placing it on negative watch - further weakness in the Thai baht is definitely expected ??“ and with possible serious impact on other emerging-market currencies and securities??¦markets are still panicky.

Note: there is a risk that militants in the south might take advantage of the instability and cause additional problems

HUF
USDHUF rallied back towards 216.24 after the social unrest continued in Budapest. For a second straight night Hungary protestors clashed with police in violent street demonstrations. The uproar was caused by the release of tapes showing the PM admitting to lying to the people (see yesterday??™s complete note). As we stated yesterday we believe the situation will continued to escalate and the HUF to come under significant selling pressure.

UK
BoE minutes will be released today.

JPY
Japan??™s LDP will hold is presidential election to decide a successor for PM Koizumi today. In the last 24hrs Abe has made an effort to assure the markets that reform will go forward dispite speculation of rollbacks. In addition, Abe looks to have Japan become more involved in global affairs (which could lead to a confrontation with North Korea). Currently Cabinet Secretary Abe holds an insurmountable lead and with a high degree of certainty be elected PM on the 26th. We believe this will be negative for the JPY as Abe will have to make anti-reform concessions to hold onto power. See Global Report for complete details.

Note: the support/resistance levels used in the matrix??™s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar
EURUSD (1.2682 @ 13:34 GMT)
EURUSD remains choppy despite disappointing US data. Look to trade the pair with a bearish bias as long as 1.2720 resistance remains intact a break above gives scope for 1.2750. But for today sell the pair on rallies for a test of 1.2640 and possibly 1.2600.

Resist.
1.2838
1.2762
1.2721
1.2682
1.2645
1.2610
1.2534
Support

Quoted:
20 Sep 06
13:34 GMT


British Pound/US Dollar
GBPUSD (1.8872 @ 13:34 GMT)
GBPUSD continues to recover from the 1.8600 lows but remains with a bearish bias as long as 1.8903 61% retracement (from 1.9090-1.8602) and the 1.8918 top from September 14 remain intact. For today be a seller on rallies as long as 1.8850 resistance is not broken for a 1.8865 intra-day target. For the upside look to stop reverse above mentioned resistance for a 1.8760 short term target. For a more sustained downside break again 1.8720 needs to be taken out.

Resist.
1.9059
1.8944
1.8884
1.8872
1.8769
1.8714
1.8599
Support

Quoted:
20 Sep 06
13:34 GMT

US Dollar/Japanese Yen
USDJPY (117.19 @ 13:34 GMT)
USDJPY still range bound and trading extremely choppy. The pair still trading above the bear trend line from April presently at 117.20 where key support should be found intra-week. But USDJPY still remain within the major triangle pattern with the bear trend line form 98 presently at 118.75 giving traders second thoughts of adding to longs before a clear brake. For today look for a break solid break of 117.00-20 which would give scope for a 116.50 intra-day target.

Resist.
119.88
118.75
118.25
117.19
117.12
116.49
115.36
Support

Quoted:
20 Sep 06
13:34 GMT

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