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Tuesday December 18, 2007 - 19:27:28 GMT
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FX Research - Morning Report

Morning Report  Wednesday 19 December 2007

News and views
New Zealand dollar started the overnight session with a more positive tone, but ended much where it began. Yesterday’s mildly positive NBNZ business confidence survey and a more hawkish tone to the RBA’s meeting minutes helped to pick up the NZD from its lows. The currency slowly made its way up to 0.7580, but fell sharply in the New York session, once again threatening trendline support around 0.7530 but without making a clean break lower.

The Australian dollar benefited after the RBA’s minutes from its December review showed a more hawkish tone than the initial statement suggested. The minutes indicated that the RBA would probably have raised rates this month, were it not for the credit market turmoil that has already pushed up short-term funding costs. If these funding pressures fade in the new year, another RBA hike is on the cards. The AUD tracked up to 0.8640 before suffering a similar drop to the NZD.

Goldman Sachs bucked the trend on Wall Street with record earnings for the quarter, after taking bets against subprime mortgage debt. However, the positive sentiment from this news was dimmed after they noted that their Alpha hedge fund continues to struggle and redemptions are likely to increase next year. US equities fell into negative territory after a strong gain on the open, and carry currencies meekly followed them lower. The news flow isn’t likely to get any better this week, with Morgan Stanley and Bear Sterns expected to report quarterly losses.

The ECB injected a record €349bn of funds in an effort to ease liquidity pressures over year-end. The ECB offered to lend an unlimited amount of funding for a two-week period at a rate of 4.21%, well below yesterday’s market rate of 4.90%. Short-term funding rates fell substantially as a result; the one-month rate ended the day 33bp lower. The BoE also held a liquidity auction with less dramatic results, though it may be that UK banks took advantage of the ECB injection as well. The Fed reports the result of its first funding auction tonight.

US housing starts renewed their slide with a 3.7% fall in November, in line with forecasts. A 46% bounce in multiples had enabled starts to post their first monthly gain in October, but that volatile component was about flat in November, so the underlying weakness in single family house starts (now down for eight months running) was the main driver of the decline. In annualised terms, single family house permits were running at 764k in November whereas starts were on 829k, suggesting further starts weakness ahead.

UK CPI steady at 2.1% yr in November. The headline CPI remained marginally above the 2% target but did not rise further. Fuel was a big positive and food prices accelerated a little further but there were offsets from favourable utility bill base effects (price increases a year ago dropping out of the calculation). The slight rise in the RPI inflation measure is a mild concern as it is used as the basis of wage negotiations and risks inflation expectations rising. Upside risks to inflation may soon show through as favourable base effects subside and if this year’s energy and food price rises persist.

Canadian CPI 2.5% yr in November, core 1.6%. A combination of base effects, gasoline price rises and mortgage costs lifted the headline CPI slightly in November, but the core rate was constrained even more than we expected, especially by sectors exposed to the (then) appreciating C$. Along with a sharp slowing in the leading index, this news should give some additional comfort to the Bank of Canada that this month’s rate cut was the right thing to do.

Volatility over the Christmas period and a softer tone to recent economic data are likely to keep the NZD under pressure in the short term. Recent market movements are the flipside of the ‘hope’ trade: it was the hope of sharply lower interest rates that supported asset values in the early part of this month, and with uncomfortably strong US inflation figures last week, those hopes have been scaled back.

The heavy data calendar continues with migration and food prices today. Migration is expected to show a net annual outturn of around 6,760, on its way to a trough of 4,600. Food prices (Wed) are volatile from month to month, but are starting to accelerate again on an annual basis. We release the Westpac McDermott Miller consumer confidence survey overnight.

Upcoming Events
Date Country Release Last Forecast

19 Dec NZ Nov External Migration ann. 7,500 6,760
Nov Food Prices 0.6% 0.4%
Aus Oct Westpac-MI Leading Idx 5.8% n/f
US Fedspeak: Lacker
Ger Nov Producer Prices %yr 1.7% 2.1%
Dec Ifo Business Climate Idx 104.2 103.5

UK Dec BoE Minutes 2:7 5:4
Q3 Business Investment (F) 0.0%a n/f
Can Oct Wholesale Sales 1.1% 0.4%
20 Dec NZ Q4 Consumer Confidence 113.5 n/f
Q3 Current Acct NZDmn s.a. -3,411 -3,26

Latest Research Papers/Publications
• NZ 2007/08 HYEFU Review (18 December)
• NZ Weekly Forex Outlook (17 December)
• NZ Q3 GDP Preview (14 December)
• NZ Q3 Current Account Preview (13 December)
• NZ HYEFU Preview (13 December)
• NZ Q3 Terms of Trade (11 December)

These papers/publications are available on Online Research on
Westpac Institutional Bank’s website (

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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