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Tuesday March 11, 2008 - 20:34:56 GMT
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FX Research - Morning Report

Morning Report   Wednesday 12 March 2008 

News and views
New Zealand dollar raced higher overnight, as investor risk appetite received a shot in the arm from new liquidity measures announced by several central banks. The NZD began to pick up off its lows around 0.7880 late yesterday, and gains in the euro helped it to break through resistance at 0.7960. The new liquidity measures sent the NZD back above 0.8000, where it stayed for the rest of the day. The biggest gains came against the yen and the Swiss franc – the stereotypical ‘funding’ currencies for carry trades – as investors grew in confidence. The NZD also outpaced the AUD, though the latter potentially has more to gain from any easing in liquidity pressures, given how far Australian credit spreads have blown out in recent days. The AUD reversed the previous day’s losses to settle at around 0.9260.

The key liquidity measure came from the Fed, which announced a new Term Securities Lending Facility (TSLF). The facility will lend up to $200bn of Treasury securities to dealers for 28-day terms (rather than overnight, as in the existing program), and will accept a wider range of collateral including federal agency debt and AAA-rated residential mortgage-backed securities (RMBS). This should make it easier for dealers to fund their balance sheets by in turn lending the Treasuries in exchange for cash. This move has seen the Dow bounce by 3.5% and credit spreads narrow significantly.

The euro initially gained after some better than expected data and hawkish comments by officials, but was knocked lower after the Fed announcement and a stronger US trade balance. The ZEW analyst’s survey reported managed a partial recovery for the second month rising to -35 against market forecasts of -42. Even so, expectations have deteriorated sharply from June 2007, when they were at +20. The current conditions index continues to moderate. German Economy Minister Glos sounded relaxed about the euro’s strength, seeing no reason for short term fears about the high EUR level, albeit observing that some sectors are indeed feeling the pinch of its strength. ECB council member Weber said that price pressures do not give room for rate cuts, even through to 2009, where the inflation outlook is particularly worrying given expectations for robust growth.

The US trade deficit was lower than expected in January at $58.2bn. Exports are now up 16.6%yr, propelled higher by the record low US dollar, compared with imports up 11.9%yr. Net exports added 0.9% annualised in Q4 and look set to add to GDP growth in Q1. However, record high oil prices are taking a toll on the trade position, with the petroleum deficit jumping to $35.1bn for the month. The ex-petroleum deficit narrowed from $26.5bn in Dec to $23.1bn, the smallest deficit since October 2002.

The UK RICS housing market survey found that the number of property agents and surveyors reporting price falls exceeded those reporting gains by 64.1% in February. The RICS survey suggested that the deepening housing slump is the worst since the eve of the nation’s last recession in 1990. The DCLG price report showed that annual price gains moderated further in January, to be well down from the 12%yr pace of mid-2007.

We have to think that the measures announced by the Fed will have a significant impact on market confidence in coming weeks, particularly given the end-of-quarter liquidity pressures that have tended to emerge since the credit crunch began last year. In the longer term, though, nothing short of full disclosure of credit losses will allow credit markets to heal.

The NZD and AUD will naturally benefit from improved sentiment, though a test of their recent highs may be a stretch. Part of the earlier enthusiasm for the AUD in particular was due to expectations of further central bank tightening; but with higher funding costs being passed through into mortgage rates, the market is doing a lot of  the work for the RBA. Similarly, while we may see the market trim back expectations of OCR cuts, there will be little interest to price in hikes any more. 

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

Latest Research Papers/Publications
• NZ Q4 Terms of Trade Review (11 March)
• 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 Feb Food Price Index 0.4% 1.3%
Aus Mar Westpac-MI Consumer Sentiment 97.4 –

US Feb Mthly Budget Statement USDbn –120.0 –165.0
Jpn Q4 GDP 2nd Estimate %qtr 0.9% 0.6%
Feb Corp. Goods Prices %yr 3.0% 3.3%
Jan Current Account ¥bn 1855 2000
Feb Consumer Confidence 37.9 –
Eur Jan Industrial Production –0.2% 0.4%

UK Budget Statement


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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