Australian FOREX Weekly Outlook 16/05/2006

16/05/06

last week’s recap

The Dollar continued to lose ground versus the major currencies last week as the market continued to focus on the issue of global imbalances. The small than expected US trade deficit gave the dollar some temporary relief as it recovered slightly. The Euro continued to gain against the weak US dollar and was also assisted by comments from German Bundesbank President Weber saying further tightening was needed. The Japanese yen strengthened as well against the dollar with comments by Japan Finance Minister Tanigaki failing to halt the US dollar slide. Tanigaki once again restated Japan FX policy by saying rapid moves in FX was undesirable. The Sterling continued its run higher nearing 1.9000 underpinned by recent comments from a member of the Bank of England’s Monetary Policy committee stating that they were confident the economy has recovered. The Aussie’s continued to rise against the dollar supported by surging metals prices and gold hitting a 25 year high of $US721.50 an ounce and copper reaching an all time record high.

The week ahead

Central banks are on heightened data alert and this can also be seen in the markets. The FOMC hedged its bets at the latest meeting, leaving the future course of monetary policy dependent on the way the data come in. This now puts it in the same position as monetary authorities elsewhere. This will mean even greater market sensitivity to the data than usual.

In the States the regular industrial production/capacity utilization report is due out on Tuesday with a general consensus of 0.4% / 81.5% as well as housing starts which are expected to have slowed. The rise in energy prices in April will impact both the PPI (due out on Tuesday) and CPI data (due out on Wednesday) which will have implications for the annual rate of core inflation. The important change affecting consumer prices in April was the increase in retail gasoline prices to – or in some cases above – US$3 a gallon. The impact is widely believed to be a rise in the headline CPI by 0.5% (data due out Wednesday). We will provide our previews of these data releases in the daily summary.

In the Eurozone In Germany, the ZEW survey (Tuesday) may disappoint again as the survey has been at odds with most other German (and Eurozone) surveys recently, having declined in each of the past three months (albeit from an especially high level). Market expectations are that the retrenchment continued in May under the influence of a higher Euro. In the UK a heavy data run is expected in the coming week where the one which would appear to have the greatest potential to surprise in the short-term is retail sales (Thursday). The other key release in the UK will be the inflation data (Tuesday) and the upward crawl in the level of unemployment is also expected to continue (Wednesday). We will provide our previews and reviews of these data releases in the daily summary.

In Japan the market is expecting to get confirmation that the exceptional surge in GDP growth in Q4 did not continue into Q1 (Friday). The BoJ’s assessment of the situation will be summarized in its updated monthly report (Friday).We will provide our previews and reviews of these data releases in the daily summary.

Key Weekly Pivot levels

• Euro 1.2823

Initial support at 1.2702 (23.6% retracement of the 1.1825 to 1.2973 advance) followed by 1.2660 (May 9 low). Initial resistance is now located at 1.2973 (May 15 high) followed by 1.3000 (Psychological resistance).

• Yen 110.20

Initial support is located at 109.21 (61.8% retracement of the 101.67 to 121.41 advance) followed by 108.76 (Sep 5, 2005 reaction low). Initial resistance is now at 110.74 (May 12 high) followed by 111.54 (May 11 corrective high).

• Pound – 1.8836

Initial support at 1.8788 (May 15 low) followed by 1.853 (May 11 corrective low). Initial resistance is now at 1.9000 (May 12 high) followed by 1.9078 (May 5, 2005 corrective high).

• Aussie – 0.7638

Initial support at 0.7606 (May 15 low) followed by 0.7551 (May 2 corrective low). Initial resistance is now at 0.7749 (May 15 high) followed by 0.7795 (May 11 reaction high).