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Wednesday December 12, 2007 - 19:58:42 GMT
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FX Research - Westpac Institutional Bank - Morning Report

Morning Report  Thursday 13 December 2007

New Zealand dollar
NZD ends volatile day higher as Central Banks act.
Although the Federal
Reserve cut both the Fed Funds rate and the Discount rate by 25bps at yesterday’s FOMC, disappointment that a more aggressive cut in the Discount rate was not delivered saw
US equity markets fall dramatically. “Carry” currencies were sold immediately following the release and the NZD fell sharply from 0.7840 prior to the announcement to a low of 0.7715. The currency squeezed higher over the afternoon to end the local session well off these lows before rocketing higher overnight, following news that the major Central Banks would co-ordinate measures to add liquidity over year-end. The NZD peaked at 0.7937, before settling back at 0.7890, from where we open this morning.

Australian dollar
AUD reverses from lows Banks move to ease liquidity.
With the Dow Jones ending almost 300 points lower, the AUD was also sold heavily following the FOMC announcement. The currency was smashed from an early session high of 0.8895 to intra-day low of 0.8728, before recovering well into the local session close. An increase in consumer sentiment in December was lost in volatile trading and the currency continued higher during the off-shore session, as moves by Central Banks to ease credit markets boosted appetite for higher yielding currencies. The AUD peaked at 0.8908 overnight and opens at 0.8830, this morning.

Major currencies
Fed cuts 25bps and backs up with new liquidity measures.
Yesterday started with the US Federal Reserve cutting the Fed funds rate and discount rate by 25bps to 4.25% and 4.75% respectively. The USD rallied against most of the majors as the market saw this as USD positive move as opposed to a cut of 50bps which was seen as a strong possibility. The euro fell to a low of 1.4651and GBP to 2.0340 before buyers returned slowly taking them higher throughout the day. US Equities were sold off initially as the 25bps cut was not seen as enough and this led to risk aversion and carry trade unwind. This saw the USD/JPY fall from 111.70 to a low around 110.64. Overnight has seen the above picture reversed as Central Banks of US, Europe, England, Switzerland and Canada jointly announced measures to alleviate global markets funding pressures. The Fed has said it will establish a “temporary term auction facility” that will allow banks to obtain funds through another avenue to the current discount window.

Economic data and events
The Fed, European Central Bank, Bank of England, Swiss National Bank and Bank of Canada
today jointly announced measures intended to alleviate funding pressures in global money markets. These include the establishment by the Fed of a temporary term auction facility, the arrangements for which will allow a wider range of (sound) financial institutions access to liquidity for up to five week terms, at market determined rates. The ECB and SNB will offer US$ funding to European counterparties (thanks to swap lines set up with the Fed). The BoE and BoC announced measures including increased funding availability at upcoming operations and a wider range of accepted collateral (full BoE details to be published this Friday, but we do know that they will now accept securities denominated in a wide range of currencies, including Aussie dollars).

US trade deficit widened to $57.8bn in Oct. The trade deficit widened from an upwardly revised (by $0.6bn) Sep. Exports were not as solid as we expected, with about three quarters of the rise coming from increased civilian aircraft sales (consistent with Boeing figures). Other exports were mostly subdued, including a 3.2% fall in consumer goods, that category’s first decline in four months. Imports figures were mixed as well, with much of the gain coming from the higher price of oil. Looking ahead to Nov, the 2.7% surge in import prices, mostly due to oil prices, almost guarantees that the deficit will widen even further then. Separately, the Canadian trade surplus widened to C$3.3bn in Oct.

Japan October current account recorded a surplus of ¥2,229bn, a seasonal narrowing from ¥2,883bn in Sep.

Euroland industrial production posted a 0.4% Oct rise. A strong French outcome offset declines in factory output in Germany and Italy.

UK unemployment falls 11k in Nov. Benefit claimant count unemployment continues to post solid falls, no doubt reflecting the strength of the economy up until Q3 this year. That message was backed up by the separate household survey which found that employment grew by 114k in the three months to Oct, up from a 91k gain in May to July – sufficient to pull the jobless rate (ILO definition) down a tick to 5.3%.

Upcoming Events
Date Country Release Last Forecast

13 Dec NZ Oct Retail Sales 1.0% 0.3%
Aus Nov Employment chg 12.9k 20k
Nov Unemployment Rate 4.3% 4.3%
Dec MI Inflationary Expect 4.4% n/f
Dec WBC-MI Unemp. Expect 4.9% n/f
US Nov PPI/Core 0.1%/flat 2.0%/0.1%
Nov Retail Sales/ex auto 0.2%/0.2% 0.7%/0.5%
Initial Jobless Claims w/e 8/12 338k 340k
Oct Business Inventories 0.4% 0.5%
Jpn Oct Industrial Production (F) 1.6% n/f
Eur ECB Monthly Report
UK Nov House Prices net bal % -22.2 -26.0
Dec CBI Industrial Trends Survey -6 8
Can Oct New House Price Index 0.3% 0.3%
Oct Manufacturing Shipments -0.9% -1.5%
Q3 Labour Productivity 0.2% 0.1%
14 Dec NZ Q3 Real Manufacturing Sales 0.4% n/f

US Nov CPI/Core 0.3%/0.2% 0.7%/0.2%
Nov Industrial Production -0.5% 0.3%
Nov Capacity Utilisation Rate %81.7% 81.7%

n Dollar Zealand Dollar

Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 14 November 2007. All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.



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