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Wednesday February 6, 2008 - 19:45:07 GMT
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FX Research - Morning Report

Morning Report    Thursday 7 February 2008

News and views
Yesterday’s US ISM non-manufacturing report was a shocker,
collapsingfrom 53.2 to 44.6 in January. The construction and services ISM plunged to lows seen only twice before in the survey’s decade of history – straight after the 9/11 terror attacks in 2001 and during the Iraq war in 2003. On both those occasions, the ISM quickly rebounded in subsequent months. The latest result is difficult to believe given that other recent economic data have been mixed rather than devastatingly weak, including the ‘sister’ factory ISM survey which rose back above 50 in January. But, on the face of it, today’s ISM number is indicative of recession, with businesses reporting plunging activity, orders and jobs.

Risk appetite was hit hard by the news – US equities fell by about 3%,and Asian markets managed to squeeze in larger falls before closing early for the Chinese New Year celebrations. Most of the major currencies fell sharply against the US dollar, except for the relative safe-havens of the Swiss franc and the yen. The New Zealand dollar fell from 0.7940 earlier in the day to just below 0.7800 after the US data. The Australian dollar also sank from its highs just below 0.9100 to end the day at 0.8950, garnering no support from a 25bp interest rate hike and hawkish statement by the RBA on Tuesday afternoon.

Overnight markets opened with some trepidation of a repeat of the previous day’s moves. Early on the pound fell below 1.96 on weaker UK data, and the Australian dollar fell through trendline support at 0.8940, but further selling failed to eventuate, and the NZD and AUD were steadily bid for the rest of the day. US equities began with a decent bounce, though they are closer to flat at the time of writing.

UK consumer confidence fell further on the Nationwide measure, from 85 to 81 in January, in contrast to the slight up-tick in the January GfK measure reported last week. Still, both indices continue to show a downtrend, which is an accurate reflection of the mood on the street in the UK. The BRC shop price index remained at 1.2%yr, suggesting that concerns about widespread inflationary pressure in the UK are overdone – a view that the BoE is gradually coming to, with a 25bp rate cut likely tonight.

Feedback from unnamed officials indicates that the communiqué from this week’s G7 meeting will not say anything new on currencies. US Treasury Secretary Paulson has noted in recent days that China has been moving faster in allowing the yuan to rise, and that pushing them harder would be inappropriate in the current environment.

The weak US data has left the New Zealand dollar on the back foot again, though it will be a while before we know if this was more than a temporary blip. Still, there is little to suggest that the broad trend in the NZD has changed – it remains within the relatively narrow, slightly upward-trending channel it has held for the last four months, which is consistent with a 0.76- 0.80 range in the near term.

Today sees Q4 employment data at 10:45am. Tuesday’s wages growth figures were a major surprise for such a stable series, and the hours paid suggests upside risks to our top-of-the-range forecast of 0.6% employment growth (though last time this indicator pointed in the wrong direction). The combination of strong labour market data, the hawkish stance from the RBA, and a tentative stabilisation in global markets would greatly increase the odds of a hawkish RBNZ at the March review – contrary to the prevailing sentiment that further hikes are not only unexpected but unthinkable.

Events Today
Country Release Last Forecast

NZ Q4 HLFS Employment –0.3% 0.6%
Q4 HLFS Unemployment Rate 3.5% 3.4%
US Initial Jobless Claims w/e 2/2 375k 344k
Dec Pending Home Sales –2.6% –2.0%
Jan Chain Store Sales %yr 0.9% –
Dec Consumer Credit $bn 15.4 7.3
Eur ECB Repo Rate Decision 4.0% 4.0%
Ger Dec Factory Orders 3.4% –2.0%
UK Dec Industrial Production –0.1% flat
BoE Repo Rate Decision 5.5% 5.25%

Latest Research Papers/Publications
• NZ Q4 LCI and QES Review (5 February)
• NZ Weekly Forex Outlook (4 February)
• NZ Q4 labour market preview (30 January)
• NZ Interest Rate Focus (30 January)
• NZ Economic Overview January 2008 (28 January)
• NZ Weekly Forex Outlook (28 January)
• RBNZ Jan OCR Review (24 January)

These papers/publications are available on Online Research on
Westpac Institutional Bank’s website (


Michael Gordon, Market Strategist, Wellington, Ph: (04) 470 8266
With contributions from Westpac Economics and Westpac Strategy


Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 7 February 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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