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Tuesday February 12, 2008 - 20:50:23 GMT
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FX Research - Morning Report

Morning Report  Wednesday 13 February 2008

News and views
High-yield currencies came back into favour
after some positive news from credit markets for a change. The New Zealand dollar traded up to one-week highs around 0.7950, before bumping up against trendline resistance, while the Australian dollar reached as high as 0.9080 before settling back at 0.9040. The cross rate remains mired within its recent 0.87-0.88 range.

The first good news came from US investor Warren Buffett, who said that he had proposed a plan to three of the troubled bond insurers that would see him cover the risk of $800bn of insured municipal bonds. While the plan would probably stabilise the municipal bond market itself, it’s not quite as generous to the insurers, as it appears to involve charging them for re-insurance (at an appropriate price) – so it’s perhaps not surprising that none of the insurers have taken up the offer yet. Buffett’s move may be symbolic more than anything – a sign that much of the bad news has been factored in, and that cashed-up investors are now hunting for bargains. Even so, it was enough to boost market confidence – the Dow rose by about 1.5% from the open and US ten-year bond yields bounced 5bp.

The other positive credit news was the launch of “Project Lifeline”, a plan by six of the largest mortgage lenders and backed by Treasury, which will provide a 30-day workout period for homeowners who are behind on their mortgage payments. The scheme is more generous than the previous proposal, which would have only covered sub-prime borrowers who were meeting current payments but would struggle when their mortgage rates were reset at higher levels.

San Francisco Fed president Yellen reiterated her view that “slow growth rather than recession” was the most likely outlook, “but I’m not confident” and recession risk persists. She said it was too early to consider retightening policy, though that time would come. Yellen is probably the most ‘dovish’ of the Fed governors, but is a non-voting member of the FOMC this year.

The German ZEW economic sentiment survey edged up to -39.5 in February, beating market forecasts of a fall to -45 (and an early rumour of -50). This was the first rise in the index in nine months, though still the second lowest reading in 15 years. Less encouragingly, the current conditions measure fell sharply from 56.6 to 33.7, consistent with other survey evidence pointing to a weaker 2008 for the German and broader euro zone economies.

The pound dipped briefly after the UK inflation figures, but soon recovered and rose above 1.96. With 100bp rate cuts by year-end already factored in, the market appears to be resistant to further GBP weakness for now. CPI inflation edged up to 2.2% yr in January, but was lower than expected due to heavy discounting of apparel. The core rate was especially subdued at 1.3% yr. However, sharply higher gas bills will hit the CPI in February, so a jump in the headline rate to 3% is still on the cards for this year. The British Retail Consortium also reported unexpectedly strong sales in January – although the CPI makes it clear that discounting was a key factor.

Wobbly credit markets have kept investors on edge in recent weeks, and we suspect this has been the main barrier to a break above 0.80 in the New Zealand dollar. Last night’s news was clearly more encouraging, but it remains to be seen if this improvement in sentiment can be maintained. Investment banks are heading into the earnings reporting season, so there is the potential for more bad news in coming weeks, even after the ‘big bath’ writedowns that many took in the last quarter.

We suspect that this week’s data will be less supportive for the NZD. Producer prices this morning are likely to remain elevated – especially output prices, as higher dairy prices start to benefit processors – but this data is volatile and doesn’t add much to the already-released CPI. The REINZ report is also expected today, though a weak reading seems to be a foregone conclusion.

Country Release Last Forecast
NZ Q4 Producer Output Prices 1.6% 1.0%
Q4 Producer Input Prices 2.3% 0.5%
Aus Feb Westpac-MI Cons Sent -8.3% n/f

US Jan Retail Sales/ex auto -0.4%/-0.4% -0.3%/0.2%
Dec Business Inventories 0.4% 0.5%
Jpn Jan Corp. Goods Prices %yr 2.6% 2.8%
Dec Current Account ¥bn 2165 1912
Eur Dec Industrial Production -0.5% 1.0%

UK Jan Unemployment ch’ -6.4k -3.0k
BoE Quarterly Inflation Report

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (11 February)
• 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)

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 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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