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Tuesday January 22, 2008 - 20:56:53 GMT
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FX Research - Morning Report

Morning Report   Wednesday 23 January 2008

News and views

The Fed responded to the carnage in global equity and credit markets by cutting its key policy rate by 75bp. Rumours of an emergency rate cut have been circulating for some time, even with a scheduled review just a week away, but the size of the move – the largest in the low-inflation era – surprised everyone. The Fed said the cut was delivered due to rising economic risks, noting a deepening housing contraction and a softer labour market. They also noted that while short-term funding pressures may have eased, broader financial conditions have deteriorated and credit has tightened for households and businesses.

The accompanying statement leaves the door open for further action should the market not respond in a positive way, and in fact the money market is still pricing in another 50bp cut at next week’s review. There will no doubt be plenty of speculation as to whether the timing of the cut signals panic within the Fed about the deterioration of the US economy – justifying further steep rate cuts – or was intended to break the vicious cycle of pessimism in financial markets, which could cause more damage to the real economy if left to continue.

US equities were down for the day, after playing catch-up with the sharp declines seen elsewhere during the Martin Luther King Day holiday. European indices are a better gauge of the market reaction – the UK market ended up 2.9% and the broad Euro Stoxx 50 rose by 1.37%.

The New Zealand dollar raced higher overnight, and was easily the strongest of the major currencies. The slump in Asian equities dragged the NZD to a three-month low just below 0.7400 yesterday evening, but a more positive tone in European markets saw it recover quickly, and the surprise Fed rate cut sent the currency back to 0.7650 this morning. The 2.7% gain for the day was the second-largest since the LTCM crisis in October 1998, topped only by the 2.8% gain after the Fed’s first rate cut last September.

Most of the other majors also gained against the US dollar and the yen,
but the moves were surprisingly muted. The Australian dollar gained by
around 1%, as enthusiasm was dampened by the sense that the RBA will
find it difficult to justify further rate hikes in this environment, even if today’s
CPI figures turn out strong. As a result the NZD/AUD cross rose to 0.8800,
reversing all of the last week’s losses. The euro and pound each gained
around 1% for the day, while the yen reversed its post-Fed losses and
ended down 0.5% against the US dollar.

We noted earlier in the week that a ‘circuit breaker’ was needed to snap the market out of its extreme pessimism. The Fed’s unscheduled rate cut clearly fits the bill, though it remains to be seen if it will have a sustained effect, given the sense of panic that it seems to suggest. Equity markets, and the New Zealand dollar, could bounce further in the short term as short positions are squeezed out, but we suspect some upside surprises in the economic data will be needed to sustain the improvement in market sentiment. Today’s Australian CPI figures will be watched closely, though there is less confidence now that a strong number will lead the RBA to raise rates in February. We expect the core measures, which the RBA follows more closely, to rise 0.9% for the quarter, bringing the annual rate to 3.4%, well outside the RBA’s comfort zone.

Locally, the main event this week is tomorrow’s OCR review. We expect the RBNZ to remain on hold, but to maintain a hawkish tone. Inflation pressures are mounting, but housing is correcting a touch faster than anticipated and there is greater uncertainty around the global outlook. Wednesday 23 January 2008

Date Country Release Last Forecast
23 Jan Aus Q4 Headline CPI %qtr 0.7% 0.9%
Q4 Avg RBA Core CPI %qtr 0.93% 0.90%
Nov Westpac-MI Leading Index 5.5% n/f
US Mortgage Applic’s w/e Jan 18 28.4% n/f
UK BoE Meeting Minutes (Jan 9-10 Meeting)
Q4 GDP %qtr 0.7% 0.5%
24 Jan NZ RBNZ OCR Review 8.25% 8.25%
Dec Credit Card Transactions 1.2% n/f
US Dec Exist Home Sales %mth 0.4% –0.2%
Initial Jobless Claims w/e 19/1 301k 320k

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (21 January)
• RBNZ OCR Preview (17 January)
• NZ Q4 CPI Review (17 January)
• NZ Interest Rate Focus (16 January)
• NZ Q4 QSBO Review (15 January)
• NZ Weekly Forex Outlook (14 January)
• NZ Q4 CPI Preview (10 January)

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 23 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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