Tuesday January 15, 2008 - 20:47:59 GMT
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Westpac Institutional Bank - www.westpac.co.nz
FX Research - Morning Report
Morning Report Wednesday 16 January 2008
News and views
The New Zealand dollar fell sharply early this morning, as more bad news from Wall Street and Main Street weighed on riskier currencies. The NZD held steady around one-month highs for most of the day, but was knocked lower along with the AUD as US equity markets opened 1% lower, briefly trading just below 0.78 before bouncing to 0.7825 this morning. The Australian dollar slipped from around 0.90 to a low around 0.8870, with heavy selling against the pound seen as the trigger for the move.
The earnings reporting season for US banks is likely to create more volatility in coming weeks. Last night Citigroup reported a record loss due to $18bn of writedowns on subprime mortgage investments â€“ a worse number than forecast, but not as bad as some of the extreme predictions of $24bn, and was tempered by the news that they have secured an extra $14.5bn of capital from outside investors. Itâ€™s not unusual for a new CEO to take a â€˜big bathâ€™ on writedowns in order to make future earnings look better (and lay the blame for losses at the feet of their predecessor), but it remains to be seen if this is the final round of writedowns for the bank.
Meanwhile, US retail sales highlighted a conservative consumer. The 0.4% fall in total sales in December was worse than our below-consensus forecast of â€“0.1%, and downward revisions to previous months means that growth estimates for Q4 will be shaved back. The narrowest measure of sales â€“ ex gas, building materials and auto â€“ rose a modest 0.1%, suggesting that while consumer are being conservative, they have not completely pulled in their heads. It is this component that feeds into the GDP calculations. Despite this, the data overall was weaker than anticipated, and will help to perpetuate the belief that the Fed may cut rates this week, ahead of its scheduled review.
The US PPI suggests that upstream price pressures remain modest. December output prices fell 0.1% as we expected (the median forecast was +0.2%), while the core index revealed a firm 0.2% reading, despite year-end price breaks for vehicles. Continued weakness in the dollar, and strength in commodity prices, are likely continue to filter through to producer prices in 2008, but at this stage, price pressures further up the chain appear surprisingly subdued.
The yen continued to strengthen on talk of substantial repatriation flows as European bonds mature throughout January. Yen crosses traded heavy overall, and USD/JPY soon broke through last Novemberâ€™s low of 107.22. The euro also faced headwinds from selling interest ahead of the previous record high of 1.4965. The pound bucked the trend and made small gains against the US dollar, after stronger than expected CPI figures for December saw the market trim expectations of further rate cuts by the Bank of England.
The New Zealand dollar has not been overly responsive to recent US data, with the marketâ€™s focus turning back to domestic conditions. So weâ€™d venture that the sharp fall overnight will prove to be a short-lived cleanout of long positions, rather than the start of a substantial move lower. Yield-driven demand for the NZD remains solid, if not the dominant driver that it was in late 2006 / early 2007. As one example of this, a $685m uridashi issue was announced overnight â€“ interestingly, this replaces a $655m bond maturing at the end of the month; this would be the first time in a while that such a large maturity has been fully replaced.
Tomorrowâ€™s CPI release is likely to show headline inflation above 3% again, though this is consistent with both the market consensus and the RBNZâ€™s view, and in itself may not be enough to inspire further NZD gains. Itâ€™s the outlook beyond this thatâ€™s worrying â€“ 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 dollarâ€™s yield advantage, already at record highs.
Date Country Release Last Forecast
16 Jan Aust Jan Westpac-MI Cons Confid 1.8% n/f
Nov Housing Finance (no.) â€“0.7% 2.5%
US Dec CPI 0.8% 0.3%
Dec CPI Core 0.3% 0.2%
Dec Industrial Production 0.3% â€“0.5%
Jan NAHB Housing Index 19 20
Fed Beige Book
Eur Dec CPI %yr 3.1% 3.1%
17 Jan NZ Q4 CPI 0.5% 1.1%
Aust Dec Employ/Unemploy 52.6k/4.5% 20k/4.3%
Latest Research Papers/Publications
â€¢ NZ Q4 QSBO Review (15 January)
â€¢ NZ Weekly Forex Outlook (14 January)
â€¢ NZ Q4 CPI Preview (10 January)
â€¢ The grass will be greener (9 January)
â€¢ NZ Q4 Employment Confidence Index (9 January)
â€¢ NZ Q3 GDP Review (21 December)
â€¢ NZ Q3 Current Account Review (20 December)
These papers/publications are available on Online Research on
Westpac Institutional Bankâ€™s website (www.wib.westpac.co.nz)
Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). current as at 16 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 Westpacâ€™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. Â© 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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