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Sunday April 27, 2008 - 21:10:31 GMT
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FX Research - Morning Report

Morning Report  Monday 28 April 2008

News and views
New Zealand dollar has softened since Thursday’s cash rate review, helped along by a recovery in the US dollar. The NZD was trading around 0.7980 ahead of the statement, but fell sharply after the RBNZ noted that the OCR will need to remain at current levels “for a time yet”, a marked change from the “significant time” in the March commentary. NZD selling continued over the long weekend, taking the currency as low as 0.7785. The Australian dollar was also dragged lower by the stronger USD, though the NZD/AUD cross still managed to reach a fresh five-month low around 0.8350.

The US dollar’s rebound has been driven by growing speculation that the Fed will pause in its easing cycle after this week’s review – a view encouraged by the usual media suspects. Short-term interest rates have risen sharply in recent days, and are now barely factoring in a 25bp rate cut, followed by hikes later in the year. We don’t doubt that the Fed is becoming less willing to use the Fed funds rate to address financial sector turmoil, given the range of other measures used in recent weeks. However, leading indicators suggest that there is plenty of bad economic news to come, starting with the manufacturing ISM and payrolls this week, which should keep the Fed biased towards easier monetary policy.

US new home sales plunged nearly 9% last month, and February’s decline was revised from 2% to 5%. The volatile price data recorded a 13% yr slump compared to a year ago. The breakdown for March showed all major regions recording declines. New home sales peaked in July 2005 at an annualised pace of 1389k; in March they were running at 526k,a 62% decline. This housing report firmly contrasts with that those other indicators of the sector that have hinted the slump could be bottoming out. We would expect to see renewed weakness in existing home sales in coming months.

The University of Michigan consumer sentiment survey was revised down from 63.2 to 62.6 in the final April report, mainly due to a downward revision to the current component. As in the preliminary report, sentiment is at its lowest in 26 years. At the same time, longer term inflation expectations were revised a little higher. President Bush gave a brief speech on Friday saying that tax rebate cheques would begin arriving in households’ mailboxes from Monday – it will be interesting to see how this affects confidence and spending.

Euroland M3 growth slowed sharply in Mar to 10.3% yr, a pace last seen nearly a year ago. On that occasion, growth quickly bounced back, accelerating to above 12% yr later in 2007, so the ECB will need to see further deceleration before relaxing its concerns that M3 is growing too rapidly. Also, growth in loans to the private sector eased back only slightly from 11.0% yr to 10.8% yr. That pace suggests that the credit crunch has not yet had a material impact on the ability of households and firms to gain access to credit (in contrast to a recent ECB survey which suggested banks had been tightening lending standards).

The German IFO business confidence survey fell sharply to 102.4 in April, suggesting that oil price gains, euro appreciation, worries about the global economy and realization that the ECB won’t be cutting rates any time soon have finally impacted on bosses’ assessment of their current situation and the outlook. The decline reverses the prior three months of gains, plus a little bit more.

UK GDP growth eased to 0.4%, its slowest pace in three years, in Q1. The limited breakdown available with this preliminary report showed services growth edging down from 0.7% to 0.6%; production contracting 0.1% after a 0.2% gain in Q4; and construction braking from 1.1% to 0.5% growth. Forward indicators point to a further slowdown in growth in Q2, which we expect the Bank of England to respond to by cutting rates several more times this year.

With the New Zealand economy set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, the NZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile was given further support by last week’s dovish RBNZ statement. However, any underperformance is more likely to be reflected in the non- USD crosses, with the US dollar still struggling to get traction even with the market now anticipating an end to the Fed easing cycle.

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

Upcoming Events
Date Country Release Last Forecast

28 Apr Jpn Mar Retail Sales %yr 3.2% 1.0%
Eur Euro Commission Spring Forecasts
Ger May GfK Consumer Confidence 4.6 4.5
29 Apr NZ Mar Merchandise Trade NZDmn 258 600

US Feb House Prices %yr –10.7% –11.5%
Apr Conf Brd Cons Confidence 64.5 60.0
Eur Apr Retail PMI 48.2 –
Ger Apr CPI %yr Prelim 3.1% 2.8%
UK Mar Net Consumer Credit £bn 2.4 1.5
Mar Net Mortgage Lending £bn 7.4 7.0

Latest Research Papers/Publications
• RBNZ OCR Review (24 April)
• NZ Economic Overview April 2008 (21 April)
• NZ Weekly Forex Outlook (21 April)
• RBNZ OCR Preview (18 April)
• NZ Q1 CPI Review (15 April)
• NZ Weekly Forex Outlook (14 April)

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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