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Monday January 14, 2008 - 19:53:28 GMT
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FX Research - Morning Report

Morning Report  Tuesday 15 January 2008


News and views

The New Zealand dollar made steady gains over the last 24 hours, returning above 0.7900 to a one-month high. The currency has been supported by its growing yield advantage – already at record highs – and a greater focus on the relatively solid outlook for the domestic economy. The Australian dollar was dragged higher by the strong kiwi, briefly trading above 0.9000. However, talk of an option structure being defended around this level prevented further gains. The run of strong Australian data continued yesterday, with the TD–Melbourne Institute inflation gauge jumping 0.6% in December and job ads rising to record highs.


Speculation that the Fed will come to the rescue with deep rate cuts – a view reinforced in recent speeches by Fed chairman Bernanke and other governors – has given a boost to riskier markets in recent days. Our US data ‘surprise’ index suggests that the pulse of US data in recent weeks has actually been fairly balanced – certainly better than it was through the second half of 2007. The impetus for Fed cuts seems to come instead from the upcoming earnings reporting season for US investment banks, many of which are expected to announce further multi-billion dollar writeoffs on subprime mortgages and other credit products.


But Fed expectations may be becoming excessive: market pricing for the 31 January meeting now sits roughly halfway between a 50bp and a 75bp cut. There was even speculation that the Fed would announce a cut overnight, in between scheduled reviews, as suggested by a US think tank last week. The NZD and AUD pared back their gains when that didn’t eventuate at the New York open. However, equities overcame any disappointment and remained well into positive territory for the day.


The pound remained under pressure despite some relatively favourable UK data. Producer output prices rose 0.5% in December, with upward revisions to history bringing the annual rate up to 5%. The core measure was also stronger than expected at 0.4%. This suggests upside risks for tonight’s consumer and retail price figures, providing some support for the Bank of England’s reluctance to cut interest rates further. Nevertheless, the pound continued to weaken, reaching its lowest point against the euro since the common currency was introduced in 1999.



The New Zealand dollar continues to creep higher, but remains consistent with the 0.74-0.79 range of recent months. Interest rate markets have seen a similar drift, in part due to a shortage of fresh information on the local economy lately. Things get more interesting this week though, with the NZIER business opinion survey today and CPI on Thursday. Rising interest rates and record-equalling petrol prices will give businesses some reason for concern (and the sector with the most reason to be upbeat – dairy farming – is not included in the survey),  but the components such as capacity utilization and difficulty finding workers will be crucial.


The CPI is likely to show headline inflation above 3% again, though this is consistent with both the market consensus and the RBNZ’s view, and in itself may not be enough to send the NZD higher. It’s the outlook beyond this that’s worrying – we expect inflation to average well over 3% in the next few years, and could even exceed 4% this year. As the market becomes more aware of this prospect, expect more talk about OCR hikes rather than cuts, and a further widening of the NZ dollar’s yield advantage, already at record highs. Further rate hikes in Australia are also on the cards, possibly as early as February. RBA Governor Stevens’ speech on Friday night on the outlook for 2008 is expected to signal further tightening, and a strong CPI reading next week would likely seal the case.


Upcoming Events

Date Country Release Last Forecast

15 Jan NZ Q4 NZIER Bus Confidence –27% n/f

US Dec PPI 3.2% –0.1%

Dec Retail Sales 1.2% –0.1%

Nov Business Inventories 0.1% 0.3%

Jan NY Fed ‘Empire’ Survey 10.3 12.0

Ger Jan ZEW Economic Sentiment –37.2 –40.0

UK Dec CPI 0.3% 0.5%

16 Jan Aust Jan Westpac-MI Cons Confid 1.8% n/f

Nov Housing Finance (no.) –0.7% 2.5%

US Dec CPI 0.8% 0.2%


Latest Research Papers/Publications

• NZ Weekly Forex Outlook (14 January)

• NZ Q4 CPI Preview (10 January)

• The grass will be greener (9 January)

• NZ Q4 Employment Confidence Index (9 January)

• NZ Q3 GDP Review (21 December)

• NZ Q3 Current Account Review (20 December)

• NZ Q4 Consumer Confidence (20 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 15 January 2008. 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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