NEWS / Government Ministries

Forex Mellon FX Daily - U.S. Edition

Key Points
??? USD weakens after FOMC statement, although little has changed with regard to future policy risks.
??? EUR-USD threatening top end of current range around 1.2650.
??? US data today ??“ durables, new home sales ??“ could be significant.
??? RBNZ leaves rates unchanged but warns of possible future tightening.
??? NZD holds support, but will retain near-term vulnerability against the AUD.
??? Oil price advance helps the NOK.

Market Outlook
There were some minor changes in the FOMC statement and Lacker once again dissented and voted for a 25bp rate hike. On the economy they noted that ???economic growth has slowed
over the course of the year??? rather than ???the moderation in economic growth appears to be continuing???. Furthermore, the Fed ends this paragraph with a new sentence on the growth outlook - ???Going forward, the economy seems likely to expand at a moderate pace??? ??“ lending support to the soft-landing scenario. Apart from them dropping the reference to the high prices of energy and other commodities, the paragraph on inflation was unchanged (i.e. readings on core inflation have been elevated but should moderate over time). The overall conclusion was exactly the same ??“ ???the committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.???

The USD weakened in response to the news, there being some relief perhaps that something more hawkish was not advanced. The EUR has also been underpinned this week by some positive developments from the Eurozone side. German CPI and IFO have been stronger than expected and ECB officials, while not committing about what will happen to rates in 2007, have done little to discourage the notion that further rate hikes will be seen.

EUR-USD strength has continued this morning, with the top end (1.2630-50) of the current range being threatened. A close above there would suggest further short-term gains, although major USD weakness looks unlikely. Little has changed with regard to Fed policy risk ??“ all options remain open, as before. The risk of a further tightening in policy in Q1 remains in place. Below 1.2620 would alleviate this upside risk for today. The tone of today??™s US data ??“ durable orders, new home sales ??“ will also be significant.

The strengthening in the oil price (albeit a touch softer this morning) is also being cited as a contributory factor to USD weakness, on the basis that it will increase upward pressure on the trade deficit as well as dampening down consumer demand. However, one could argue that the same applies to most other developed economies. Yesterday??™s surprise drop in weekly oil inventories removes the main short-term negative holding back the oil price, which was otherwise looking better supported following last week??™s OPEC announcement. Further gains look likely in the oil price for the remainder of this week, although the market will be looking for confirmation of the more constructive supply backdrop in next week??™s inventories report. EUR-NOK has weakened further on the oil price recovery and while this is looking a touch oversold from an intra-day perspective, further weakness could be seen in the days ahead. Support is at 8.20- 8.22.

EUR-SEK edged higher after the Riksbank 25bp rate hike, with the policy statement failing to adopt a more hawkish tone. Resistance is at 9.24-9.25 and above there may equate to more NOK-SEK gains in the short-term ??“ risk up towards 1.13 over the coming week.

The RBNZ decided in favour of leaving rates unchanged, citing some near-term improvements in the inflation outlook. They said that ???on balance, inflation pressures appear to be abating gradually???. However, they note that medium-term pressures and risks remain in place and that ???monetary policy pressure will need to be maintained for some time to bring inflation back sustainably within the 1-3% target band???. They conclude that ???the policy outlook is little changed from our September statement. The balance of risks remains skewed to the upside. Further monetary policy tightening cannot be ruled out, and any easing of policy remains a considerable way off.''

The NZD weakened in response to the news, but has so far managed to hold on to support around 0.6550, in part because of USD weakness. The NZD will eventually regain some support in what remains a fairly constructive policy backdrop. However, in the short-term it will compare unfavourably with the AUD, given that the market will stick with the idea of a rate hike from the RBA in November. AUD-NZD will have an upside bias while above 1.1500. The AUD itself has some room up towards 0.7700.

Day Ahead
US - durable orders have fallen back a little over the past couple of months, although the overall uptrend has not really been shaken just yet (see chart). New home sales are also due out and these have been fairly volatile over the past couple of months (Aug +4.1% m/m, July -7.5% m/m). The market will no doubt be sensitive to any unusual outcomes, but given such volatility it will be difficult to reach any definitive conclusions about the underlying trend.

Japan ??“ CPI data is out tonight and weaker than expected numbers need to be avoided. One senses that the BoJ are fairly keen to press ahead with some policy tightening, but a weaker CPI trend would complicate matters. Any strength in CPI would firm up expectations of a rate hike in December.

Diary
Data/event EDT Consensus*
US Durable orders (Sep) m/m 08.30 +2.1%
US Durables ex-transport (Sep) m/m 08.30 +1.0%
US Initial claims (w/e Oct 21) 08.30 308k
US Continuing claims (w/e Oct 14) 08.30 2453k last
US New home sales (Sep) 10.00 1045k
NZ Trade balance (Sep) 17.45 -NZ$1.0bn last
JP CPI Tokyo ex-fresh food (Oct) y/y 19.30 +0.1%
JP CPI Nat ex-fresh food (Sep) y/y 19.30 +0.3%
JP CPI Nat ex-food/energy (Sep) y/y 19.30 -0.4% last
JP Retail sales (Sep) y/y 19.50 +1.0%
NZ RBNZ??™s Abel speaks 21.10

Latest data Actual Consensus*
US FOMC rate announcement unch unch
NZ RBNZ rate announcement unch unch/+25bp
JP CSPI (Sep) y/y +0.3% +0.3%
DE Consumer confidence (Nov) 9.2 8.9
SE Riksbank repo +25bp +25bp
GB BBA mort approvals (Sep, nsa) y/y +3.0% +3.0% last
* Consensus unless stated

?›™2005, 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