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Thursday February 7, 2008 - 19:55:46 GMT
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Morning Report

Morning Report   Friday 8 February 2008 

News and views
New Zealand dollar has been whippy over the last 24 hours but ended up ahead. The boost to the currency from yesterday’s stronger than expected employment figures was soon eclipsed by a return to risk aversion, as US equities fell into the close. A strong bid tone emerged late in the day, wiping out some stale short positions in NZD/AUD in the process, and taking NZD to its overnight highs around 0.7920. The rest of the day virtually mirrored this price action, with sellers taking the NZD back to 0.7830 before a rebound in US equities sent it back above 0.7900. Japanese demand has been solid in recent days, and the reason became apparent overnight as Nomura launched an $845m uridashi bond, the fourth largest on record.

The Australian dollar had a tougher time of it initially, falling to one-week lows around 0.8880 before recovering to 0.8950 this morning. Model-based traders were relentless sellers throughout the day – trading AUD vs the Dow seems to be a favourite at the moment, less so for the NZD. The NZD/AUD cross has gone sideways recently, despite a huge shift in yields in the AUD’s favour as the RBA’s rate hike was factored in; the NZD buying late in the day was enough to push out some stale short positions and send the cross rate to a six-week high.

The European currencies fell after their respective central bank meetings. First up, the Bank of England cut rates by 25bp to 5.25% as expected. The statement noted that credit conditions had tightened, consumer spending was slowing and that business surveys were pointing to weaker growth ahead. However upside risks to inflation from energy and food prices, and inflation expectations, were also noted. As a result, the statement left the door open for further rate cuts, but only at a moderate pace; in contrast the market has moved to price in a further 100bp of easing by year-end. The pound fell from 1.9530 before the release to end the day at 1.9400.

The ECB left the repo rate unchanged at 4.00%, and at the press conference ECB chief Trichet admitted that growth was likely to be currently “a little below” trend, whereas in January he had maintained the view that GDP growth would be “broadly in line” with 2% potential. Also, unlike late last year, when rate rises were seriously considered, this decision was unanimous to keep rates on hold. The euro, already softer after the BoE statement, fell a further 1%, but the sense is that the ECB was damned either way – the market has become increasing sceptical of their singular focus on inflation, and it’s likely that they would have been ‘punished’ with a weaker euro if they hadn’t acknowledged the softening growth picture in Europe.

US initial jobless claims fell by 22k to 356k last week, reversing part of their late January spike but remaining elevated. It appears that the pace of employee layoffs has quickened since the start of this year, consistent with the January payrolls report.

Atlanta Fed president Lockhart said that last month’s rate cuts were intended “to avert a deep and protracted economic downturn” and rates were now at a level which should “support movement toward trend growth by the second half of 2008”. He also said that inflation was “elevated and above my comfort zone”. With Dallas Fed president Fisher dissenting in favour of no change at the last Fed meeting, it is clear that amongst the regional committee members, there is a degree of discomfort with market pricing that suggests Fed rates have up to a further 100bp to fall.

Recent economic data has been surprisingly strong, greatly increasing the odds of a hawkish RBNZ at the March review – contrary to the prevailing sentiment that further hikes are not only unexpected but unthinkable. Indeed, the data has been beating consensus forecasts at a pace that is difficult to maintain, not least because the market usually learns to shade up its forecasts by this point. We suspect that next week’s data will be less supportive, not least because it’s a ‘housing week’, with the usual industry reports on the sector that is genuinely in a downturn. The NZD remains broadly consistent with a 0.76-0.80 range and we would favour buying on any dips toward the lower end of that range.

Upcoming Events
Date Country Release Last Forecast

8 Feb US Dec Wholesale Inventories 0.6% 0.3%
Jpn Dec Machinery Orders –2.8% 1.0%
Dec Bank Lending %yr 0.1% –
Jan Econ Watchers Survey 36.6 35.5
Ger Dec Industrial Production –0.9% 0.2%
Dec Current Account EURbn 20 17
Dec Trade Balance EURbn 19.3 16.8
G7 Dec OECD Leading Index 98.9 n/f
11 Feb Aust RBA Statement on Monetary Policy
Dec Housing Finance 4.0% –1.3%

Latest Research Papers/Publications
• NZ Q4 HLFS Review (7 February)
• NZ Q4 Wages 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)

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

ian Dollarealand Dollar

Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 14 November 2007. 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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