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Wednesday December 19, 2007 - 19:28:42 GMT
Westpac Institutional Bank - www.westpac.co.nz

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FX Research - Morning Report

Morning Report   Thursday 20 December 2007

News and views
The
New Zealand dollar had another choppy night, but remained within yesterday’s ranges. A more positive tone in the Asian session took the NZD up to 0.7580, but it was unable to build on those gains. The currency was unmoved by the Westpac McDermott Miller consumer confidence index, which fell to 110.0 in September, the lowest level since June 2006. Consumers’ confidence about their own finances was broadly unchanged, but optimism about the longer-term outlook fell sharply, thanks to a deluge of bad economic news, both international and local, in recent months.

The Australian dollar was relatively steady for most of the night, but a poor day for US equities saw the AUD drop sharply against the US dollar. Unusually, the NZD resisted much of this move, which saw the NZD/AUD cross recover to 0.8810.

US equities again faded after a solid start, dragging carry currencies lower. Morgan Stanley reported a loss of $3.56bn for the quarter, much worse than forecast, after a $9.4bn write-down on mortgage-related investments. S&P heavily downgraded one US bond insurer and put six others on a negative outlook. The results of the Fed’s term funding auction suggested good but not desperate demand for funding over year-end. The ECB also chimed in, this time to remove €150bn of overnight cash from the banking system, as it has been trading at below the 4% policy rate recently. Fed funds expectations and Treasury yields initially rose after the positive outcome of the auction, but turned sharply lower again as the bad corporate news mounted.

The pound fell below 2.00 on further evidence that the slowdown in the UK economy is becoming entrenched. The UK CBI retail survey fell to its lowest level for the year, and even weaker expectations for January sales (–5 from 11 in Dec) reflect what is apparently a disappointing Christmas shopping season.

The minutes to the December Bank of England monetary policy committee
meeting
revealed a surprise 9:0 unanimous vote in favour of the 25bp rate cut. Market speculation had centred round a 5:4 or 6:3 split. The committee concluded that worsening financial market turmoil had increased the downside risks to both activity and inflation in the medium term. However, a large (50bp) cut now would increase inflation risks. So a 25bp rate cut was agreed. The minutes noted that with the level of interest rates already restrictive, the Committee could act pre-emptively to reduce the risks from tightening credit conditions without losing inflation credibility. Reflecting this unanimity, we now expect that the BoE will cut rates again, by February if not in January.

The German Ifo index fell to 103.0 in Dec, led by a particularly steep fall in the current conditions index. Earlier this year it was expectations that were falling sharply; now it may be the case that businessmen’s assessment of actual conditions in the economy is catching up with that pessimism about the outlook. The Ifo is calling for the ECB to begin trimming interest rates in the second half of next year. Despite this, ECB chief Trichet reiterated his hawkish stance in testimony to the EU parliament, emphasising that inflation risks still dominated his thinking. Inflation indicators continue to accelerate in Europe, the latest being German producer prices, up 2.5% yr in Nov.

Outlook
Currency markets are likely to remain thin and choppy, with traders starting to down tools for the Christmas period. There is still a great deal of uncertainty about how the funding squeeze will pan out over year-end, and indeed whether it will ease at all after this period. This uncertainty is likely to cap enthusiasm for the NZ dollar in the near term.

The heavy data calendar continues today with the Q3 current account deficit. We expect no more than a small improvement as a percentage of GDP, from 8.2% to 8.1%. More marked improvements should come over the next couple of quarters as more dairy cash feeds through. Tomorrow brings the key GDP figures, where both we and the market expect a 0.4% gain. We’ve maintained for some time that the New Zealand economy would hit a soft patch in the second half of the year, and this week’s data has so far been consistent with that view.

Events Today
Country Release Last Forecast

NZ Q3 Current Account NZDmn s.a. -3,411 -3,265
Aus Dec RBA Bulletin

US Initial Jobless Claims w/e 15/12 333k 335k
Q3 GDP % ann’lsd (F) 4.9% a 4.9%
Nov Leading Index –0.5% –0.3%
Dec
Philadelphia Fed Index 8.2 5.0
Jpn Nov Trade Balance ¥bn 1073 967
Bank of
Japan Meeting 0.50% 0.50%
Ger Jan GfK Consumer Confidence 4.3 4.0

UK Q3 GDP (F) 0.7% a 0.6%
Q3 Current Account Balance £bn –9.1 –11.4
Nov PSNCR £bn –4.8 8.0
M4 Money Supply %yr 11.8% 11.6%

Latest Research Papers/Publications
• NZ Q4 Consumer Confidence (20 December)
• NZ 2007/08 HYEFU Review (18 December)
• NZ Weekly Forex Outlook (17 December)
• NZ Q3 GDP Preview (14 December)

These papers/publications are available on Online Research on
Westpac Institutional Bank’s website (www.wib.westpac.co.nz)

stralian Dollar

New 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 www.westpac.com.au 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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