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Wednesday February 13, 2008 - 20:19:52 GMT
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FX Research - Morning Report

Morning Report  Thursday 14 February 2008

News and views
New Zealand and Australian dollars fell overnight as strains in credit markets continued to weigh on investor confidence. This time the rumour mill came closer to home – rumours that Australian bank CBA was facing losses on subprime mortgages saw the AUD fall from 0.9040 yesterday to its lows around 0.8940 this morning. The rumour was particularly odd, as it began after the bank had reported its first-half earnings and confirmed that they have no exposure to the US subprime market. The AUD was the main underperformer among the major currencies, but the NZD was also dragged lower, starting this morning around a one-week low of 0.7830.

In another case of ‘sell the rumour, buy the fact’, the yen fell after authorities revealed that Japanese banks had an exposure to subprime markets of ‘only’ $14bn in December. Recent press articles had speculated that total subprime losses will reach up to $500bn, compared to the $130bn that US and European banks have revealed so far; rather than questioning whether the estimate was correct, it was assumed that the ‘missing’ losses must be held in Japan. The earlier story had seen the yen strengthen on speculation that Japanese banks would repatriate funds to shore up their balance sheets, so the confirmation of smaller losses saw USD/JPY easily punch through resistance at 108.00.

The US dollar benefited from an unexpected rise in retail sales in January. Total sales rose 0.3% thanks to a modest bounce in auto sales (completely at odds with industry data, so commercial vehicle sales must have been very poor) and higher gasoline prices. Excluding those two factors, core retail sales were flat after falling 0.3% in December. Abstracting from the monthly data, the three-month annualised core sales gain of 1.9% is unimpressive compared to the 7+% pace seen just six months earlier. That pace will deteriorate further when November’s spike in sales drops out of the calculation next month.

The pound rose after the Bank of England’s quarterly inflation report made it clear that they expect to cut rates further this year, but not as aggressively as the market has been pricing. Note too that in the next few months, the BoE expects higher gas bills to push inflation up to 3% or higher, requiring the Governor to write an open letter to the Chancellor explaining why and what is being done about it. That inflation spike should prove to be temporary. Meanwhile, unemployment continues to fall rapidly in the UK, which in hindsight is not surprising given that the economy grew 3.1% last year and ended the year with on-trend quarterly growth of 0.6% in Q4.

The Swedish Riksbank joined the increasingly lonely club of hawkish central banks, raising rates by 25bp to 4.25%. The move was a surprise given the heightened downside risks to the global economy, but the inflation outlook clearly remains worrisome for the Swedish authorities.

Wobbly credit markets have kept investors on edge in recent weeks, and we suspect this has been the main barrier to a break higher in the New Zealand dollar. And with investment banks heading into the earnings reporting season, there is the potential for more worrying news in coming weeks, even after the ‘big bath’ writedowns that many took in the previous quarter. Demand from local exporters and Japanese investors, and the residual appeal of yield spreads that continue to reach record highs, are likely to provide support within recent ranges. January food prices (today) are expected to post another solid rise, but retail sales (tomorrow) are likely to be flattish, again with price increases accounting for much of the growth in the December quarter. Australian employment figures today will be one to watch, as the market needs some reassurance that all is still well in this part of the world, after sharp falls in business and consumer confidence surveys.

Events Today
Country Release Last Forecast

NZ Jan Food Prices 0.9% 1.0%
Aus Feb MI Cons Inflation Expect’s 4.4% n/f
Feb WBC-MI Unemp. Expect’s 1.9% n/f
Jan Employ/Unemployment 20.1k/ 4.3% 26k/4.3%

US Dec Trade Balance –63.1 –62.0
Initial Jobless Claims w/e 9/2 356k 340k
Fedspeak: Bernanke testimony, Evans
Jpn Q4 GDP % saar 1.5% 2.5%
Dec Industrial Production (F) 1.4% 1.4%
Eur ECB Monthly Bulletin
Q4 GDP Adv 0.8% 0.3%
Ger Q4 GDP (Prelim) 0.7% 0.2%\
Can Dec Trade Balance C$bn 3.7 3.6

Latest Research Papers/Publications
• NZ Interest Rate Focus (12 February)
• NZ Weekly Forex Outlook (11 February)
• NZ Q4 HLFS Review (7 February)
• NZ Q4 Wages Review (5 February)
NZ Weekly Forex Outlook (4 February)
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
tralian Dollar Zealand 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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