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Wednesday January 30, 2008 - 20:43:23 GMT
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FX Research - Morning Report

Morning Report  Thursday 31 January 2008

News and views

The Fed cut its key policy rate by 50 basis points to 3.0% this morning, and indicated that they are willing to do more as required. The statement incorporated much the same wording as the one following last week’s unscheduled 75bp cut, emphasizing that today’s move was the second part of a two-step process to get rates sharply lower, quickly. The Fed clearly remains just as concerned about the state of financial markets and the flow on impact on the real economy as it was last week. Inflation concerns were summarily dismissed, once again.

Market opinion was widely spread before the decision, but on balance was priced for an 80% chance of a 50bp cut. The US dollar was dumped against all of the major currencies, US equities rebounded and long-term interest rates actually rose a few points after the announcement.

The New Zealand dollar was the biggest beneficiary of the Fed rate cut, rising from 0.7810 to around 0.7910 at the time of writing. The AUD rose strongly from 0.8890, eventually breaking through resistance at 0.9000. Indeed, if markets were nervous about the Fed decision they had a funny way of showing it – the NZD and AUD, two currencies that are highly sensitive to the world growth outlook, made the strongest gains overnight ahead of the decision.

US data before the decision again painted a mixed picture. GDP grew by just 0.6% annualised in Q4, less than the median forecast of 1.2%. The detail in the report was mostly consistent with an economy that is embarking on a period of slower growth, rather than recession. The biggest downside surprise was a relatively rare run-down in inventories which, coming after solid stock-building in Q3, meant that component shaved a steep 1.25 ppts off the GDP bottom line. Abstracting from stocks, final sales growth slowed from 4% in Q3 to around 2% in Q4: a clear slowdown but not recessionary. It is reasonable to expect that Q1 GDP growth will benefit from a degree of inventory rebuilding.

Meanwhile, the ADP private payrolls estimate rose by 130k in January. The ADP measure has had a recent tendency to overstate the official payrolls data, but nevertheless the strong result adds weight to our view that this month’s payrolls report (out Friday) will be much less weaker than the December report, which was a key factor behind the escalation of recession fears in the last month.

The European currencies bounced on the Fed rate cut, but didn’t fare so well beforehand. The pound dipped after UK new mortgages rose just 73k in December, the lowest reading this decade, providing more evidence of a slower UK household sector. With inflation holding close to the Bank of England’s 2% target despite rising food and energy prices in late 2007, the case for a February rate cut looks quite compelling. The euro held around 1.48, until the Fed rate cut sent it to two-week highs around 1.49.



Now that the Fed has delivered the confidence-boosting rate cut that was expected, the focus will turn back to the economic data – in particular, whether weak US data over year-end was confirmation of a recession or just a seasonal blip. However, the flow of news from credit markets will also be important (more so than equity markets, even though they attract more attention), and there has certainly been little cheer from that quarter recently.

With the number of major events in the US this week, you have to suspect that domestic factors would have been lost in the melee in any case; so it’s just as well that the local data calendar has been light. Today, we expect the December trade balance to improve to a $150m trade deficit, thanks to sky-high commodity prices and growing oil revenues. Strong labour market figures next week have more potential to move the NZD.

Events Today
Country Release Last Forecast

NZ Dec Merchandise Trade NZDmn –645 –150
Aus Dec Private Sector Credit 1.7% 1.2%
US Dec Personal Income/Spend 0.4%/ 1.1% 0.4%/flat
Dec Core PCE Deflator 0.2% 0.2%
Initial Jobless Claims w/e 26/1 301k 320k
Q4 Employment Cost Index 0.8% 0.7%
Jan Chicago PMI 56.4 49.0
Jpn Dec Ordinary Earnings %yr 0.1% –0.5%
Dec Housing Starts %yr –27.0% –19.1%
Dec Construction Orders %yr –3.8% –6.3%
Jan Small Business Confidence 44.5 n/f
Eur Jan CPI Flash %yr 3.1% 3.1%
Dec Unemployment Rate % 7.2% 7.2%
Jan Business Climate Index 0.92 0.85
Jan Consumer Confidence –9 –10
Jan Economic Sentiment 104.7 104.0
Ger Jan Unemployment chg ‘000 –78 –43
Dec Retail Sales –1.9% 0.3%
UK Jan GfK Consumer Confidence –14 –15
Jan House Prices %yr 4.8% 4.2%
Can Nov GDP 0.2% 0.1%


Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 24 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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