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Monday March 10, 2008 - 20:55:16 GMT
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FX Research - Morning Report

Morning Report  Tuesday 11 March 2008

News and views
New Zealand and Australian dollars fell overnight as currency markets finally began to yield to the flow of worrying news from the realm of credit. As banks try to protect their balance sheets, they have begun to call in loans made to hedge funds and other investors – even those used to buy safe assets such as US Treasuries – and any leveraged investments are coming under pressure. Rumours that a Wall Street firm was facing liquidity problems and was about to file for bankruptcy protection sent US equities lower and credit spreads wider; while the rumour was later denied, the market never recovered its losses.

The NZD slipped below 0.79 for the first time in three weeks, though it was largely sidelined in overnight trade. The AUD was more heavily sold, as traders responded to the substantial repricing of risk seen in interest rate markets in recent dys. Spreads between swap rates and government bonds – roughly speaking, a funding premium – were pushed as wide as 150bp yesterday, compared to 100bp a fortnight ago. The AUD fell from around 0.9300 yesterday afternoon to 0.9170 this morning.

The US dollar benefited from some positive wholesale trade figures for January. Inventories rose 0.8% (vs 0.5% expected), implying upside risk to Thursday’s business inventories number. After inventories made a sizeable subtraction from Q4 GDP, they look set to be a plus in Q1, and may well save GDP from printing negative in the quarter. Sales were surprisingly strong, up 2.6% ex-petroleum, suggesting gains over and above price rises. With inventories failing to keep pace with sales, there is less scope for a further inventory correction in the wholesale sector.

The euro softened after ECB head Trichet said expressed concern about excessive exchange rate moves, a less relaxed stance on the euro’s strength compared to last week’s press conference. However, the language fell short of last year’s efforts, when Trichet described past currency movements as “brutal”.

The pound sank to 2.0100 after reaching a high of 2.0220 on a strong rise in producer prices. Input prices were up 1.7% in February, 19.3%y/y. Output prices also picked up to 5.7% yr. The increase in core output prices, excluding food and energy related prices, is less dramatic, strengthening to 3.0%yr. For the Bank of England the acceleration in the headline measures will reinforce inflation concerns. UK industrial production disappointed, contracting 0.1% in January. After two months of decline, manufacturing production managed a 0.4% rebound, largely offsetting weakness elsewhere.

 Canadian housing starts remain volatile, with a surprise 15.4% jump in January.
Single family starts were reasonably subdued, rising just 1.8% following falls over the last two months. Strength was in the multiples segment, which surged 30.3% in the urban areas. The overall result emphasises the point that last week’s Bank of Canada policy easing was driven by concerns about the impact of a weaker
US economy, rather than concerns about the current pace of economic activity.

US dollar weakness and risk aversion continue to fight it out as the dominant theme in currency markets, though the latter now seems to be gaining the upper hand in this part of the world. Weak US data and credit market turmoil has been the market fully price in a 75bp rate cut by the Fed next week, and rumours of an unscheduled rate cut are still doing the rounds.

In this environment, the New Zealand dollar is likely to remain under pressure, and a test of support around 0.7620 is possible in coming weeks. For today though, the Q4 terms of trade figures could provide a bright spot – we expect a 7.5% gain, with the boom in world dairy prices finally showing through in higher export receipts over this quarter. The median market forecast is 2.9%.

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

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (10 March)
• RBNZ MPS Review (6 March)
• NZ Weekly Forex Outlook (3 March)
• NZ Interest Rate Focus (28 February)
• RBNZ MPS Preview (27 February)
• NZ Weekly Forex Outlook (25 February)

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

Events Today
Country Release Last Forecast

NZ Q4 Terms of Trade 3.6% 7.5%
Aus Feb ANZ Job Ads 1.8% –
Jan Housing Finance 0.1% 1.0%
US Jan Trade Balance USDbn –58.8 –60.0
ABC Consumer Confidence, Mar 9 –34 –
Eur Mar ZEW Economic Sentiment –41.4 –42.0
Ger Mar ZEW Economic Sentiment –39.5 –40.0

UK Jan DCLG House Prices %yr 9.1% 7.5%
Feb RICS House Price –54.7% –54.7%

Currenciesan 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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