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Wednesday February 20, 2008 - 19:58:18 GMT
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FX Research - Morning Report

Morning Report  Thursday 21 February 2008


News and views
New Zealand dollar eased lower after reaching 0.80 yesterday, though a late rally in US markets sent the currency back towards its highs for the day. The NZD tracked the Australian dollar lower as dealers took profits on recent gains, reaching a low around 0.7910. US equities bounced strongly from negative territory after Hewlett Packard beat earnings forecasts, helping to lift the high-yield currencies off their lows.

The Australian dollar fell as traders used yesterday’s wages data to trim their long positions. Wage growth matched expectations of 1.1%, but the subsequent pullback in the AUD and Australian interest rates suggests that the market was hoping for another surprise on the upside to justify the currency’s recent surge higher. The AUD slipped to 0.9120 before the bounce in US equities took it back to 0.9170.

The euro was sold heavily from 1.4710 to 1.4640 after the premier of German state North-Rhine Westphalia said that the nation’s state-backed banking system is in crisis, and that the government should play an active role in restructuring. Closer inspection suggests some regional politicking going on – North Rhine is the home of struggling state bank WestLB, which may be forced to merge with another bank.

Inflation, inflation everywhere... The US CPI rose 0.4% in January, while the core measure rising 0.3%, both beating expectations. Price increases were broad-based, including rents (up 0.3%), apparel (up 0.4%, perhaps reflecting the weaker US dollar), medical care (above trend at 0.5%), tobacco (1.1%), and personal computers (a rare rise of 1.0%). Add in 0.7% gains for both food and energy in January and you get an annual inflation rate of 4.3%. This inflation picture will ring alarm bills for the more hawkish on the FOMC; others will argue that inflation pressure now reflects previous strength in the economy, which will ease from here. US bond yields rose to six-week highs after the data, but later pulled back to end the day largely unchanged.

Meanwhile, German producer prices accelerated from 2.5% yr to 3.3% yr in January, with energy prices the main driver. Perhaps more worrying for the ECB, Germany’s largest union, IG Metall, secured a 5.2% pay rise covering the next 14 months. That’s a full 2 ppts above the current 3.2% inflation rate, and is sure to be described as “unhelpful” by the ECB chief at his next press conference. ECB officials commented that the softer tone to the early February statement was intended to provide “flexibility”, but rate cuts are not on the agenda for now.

In other data, US housing starts managed a weak 0.8% gain in January after plunging more than 20% in the last two months of 2007. However the single family house figures continued to fall away sharply, which contrasts with the recent stabilisation (at a very weak level) in homebuilder sentiment. UK money supply growth accelerated from 11.9% yr to 12.9% yr in January, and the CBI industrial trends survey reported a modest increase in total orders and a further acceleration in prices. The minutes of the Bank of England’s February meeting showed an 8:1 vote in favour of a 25bp rate cut, with the dissenter voting for a 50bp cut.

While it’s true that the New Zealand dollar has been led around by the Australian dollar in recent days, this is more a reflection of where the flow of information has been coming from (and it’s not as though we can assume away the Australian economy and what it means for New Zealand). The AUD itself has gone a long way to factoring in the ‘good news’ story, which suggests that the momentum may slow from here. However, with the market not fully pricing in a March rate hike, or a follow-up hike in coming months, it seems as if there is still some money being left on the table.

The lack of major news for the NZD will remain an issue for a while longer – today we have electronic card transactions for January, which is at best a broad indicator of the direction in retail spending. The usual monthly indicators next week – building consents, credit growth, migration, business confidence – will probably be soft, but the RBNZ’s inflation expectations survey (Tuesday) is potentially more significant and likely to be strong.

Events Today
Country Release Last Forecast

NZ Jan Electronic Card Transactions 0.0% n/f
Aust RBA Bulletin
Jan Motor Vehicle Sales 1.1% 3.5%
Q4 Full-Time AWOTE %qtr 1.0% –

US Initial Jobless Claims w/e 16/2 348k 340k
Philadelphia Fed Index –21 0
Jan Leading Index –0.2% –0.2%
Jpn Jan Trade Balance ¥bn 643 927
Dec All-Industry Index –0.5% 0.2%
Eur Dec Current Account €bn s.a. 0.7 0.2

UK Jan Retail Sales –0.4% 0.2%

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (18 February)
• NZ Q4 Retail Sales Review (15 February)
• The rules have changed (14 February)
• NZ Interest Rate Focus (12 February)
• NZ Weekly Forex Outlook (11 February)
• NZ Q4 HLFS Review (7 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

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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