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Sunday April 13, 2008 - 22:04:50 GMT
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FX Research - Morning Report

Morning Report  Monday 14 April 2008

News and views
The G7 statement over the weekend caught the market by surprise,
with the most significant change to the wording on currencies in four years. The statement noted that “since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability”, whereas previous statements have only described currency volatility as “undesirable for economic growth”. The statement also dropped the line that “exchange rates should reflect economic fundamentals”, which may suggest that the G7 is becoming concerned about the market’s ability to determine the appropriate levels of currencies.

The change was not flagged in advance, as the European finance ministers that have tended to push for stronger wording on currencies were quiet ahead of the meeting. However, supporting comments by officials suggest the change may have less to do with Europe’s ability to deal with a stronger euro and more to do with the world’s ability to live with a weaker US dollar (which has resulted in soaring food and fuel prices).

The statement reads as a clear positive for the US dollar. While the statement doesn’t signal any explicit action on currencies, it suggests that the major economies have gone one step further down the road to coordinated FX intervention. On top of this, the statement clearly shows that the G7 believes that we have yet to see the worst of the credit crisis in terms of the economic impact. This doesn’t bode well for currencies that are leveraged to world growth, such as the NZD and AUD.

The major currencies have started the day weaker against the USD, with the euro and yen taking the first hits. The USD was under pressure prior to the statement, after another sharp fall in consumer confidence and a very weak earnings result from GE. The euro traded as high as 1.5850 on Friday night, but has since fallen to 1.5690.

The New Zealand dollar came under pressure earlier in the day in response to the weak economic data of recent days, falling from around 0.8000 to 0.7930. The fall since the G7 statement has been relatively mild, settling at around 0.7900 this morning. However, once the initial orders in the major currencies are cleared, and as offshore markets open later in the day, we would expect to see a fresh wave of selling.

US data took a back seat to the G7 statement. The University of Michigan consumer sentiment survey fell 6.3 pts to a 26-year low of 63.2 in April, reflecting roughly similar deterioration in both the present and outlook indices. At the same time, inflation expectations continued to accelerate, which will not please those FOMC members who believe that inflation risks are being underestimated. It seems that the recent bad news on the jobs market and gasoline prices hitting a new record high at $3.30 per gallon have had more impact on sentiment than the modest recovery in the stock market over the past month.

US import prices surged 2.8% in March. This reflected a 9.1% jump in petroleum prices and a further acceleration in prices of non-energy imports, which confirms that US dollar weakness is putting some upward pressure on inflation. This result means the trade deficit will probably remain above $60bn in March, even though export prices posted solid growth of 1.5%.

The market response to the weekend’s G7 statement has yet to fully play out, so we may see a further wave of NZD selling over the next 24 hours. Whether this leads to sustained US dollar gains is another question – the market will certainly test the G7’s commitment to the statement, and coordinated FX intervention still appears to be some distance away. But it provides another potential negative for the New Zealand dollar, on top of the deteriorating economic outlook both at home and offshore. Improved risk appetite may provide some bounces in the currency, but we would see these as opportunities to sell.

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

Events Today
Date Country Release Last Forecast

NZ Feb Retail Sales 0.3% 0.1%
Aus Feb Housing Finance Approvals 2.3% 1.0%

US Mar Retail Sales –0.6% –0.2%
Mar Retail Sales ex auto –0.2% –0.1%
Feb Business Inventories 0.8% 0.7%
Fedspeak: Gov Warsh
Jpn Bank of
Japan Minutes
Eur Feb Industrial Production 0.9% 0.3%

UK Mar PPI Output nsa %yr 5.7% 5.6%
Can Feb New Motor Vehicle Sales 8.2% –1.5%

Latest Research Papers/Publications
• NZ Q1 CPI Preview (8 April)
• NZ Q1 QSBO Review (8 April)
• NZ Interest Rate Focus (8 April)
• NZ Weekly Forex Outlook (7 April)
• NZ Q1 Employment Confidence Index (1 April)
• Falling net migration to
New Zealand (1 April)
• NZ Weekly Forex Outlook (31 March)
• NZ Q4 GDP Review (28 March)

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




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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