News and views
FX markets were subdued overnight, with traders settling in for the Fedâ€™s rate review on Thursday morning, and no major data to cause them to budge. The US dollar generally lost ground against the other majors, in keeping with a small reversal of the recent sharp gains in US interest rates. Market pricing is still consistent with a final 25bp rate cut this week, followed by hikes later in the year â€“ a view that is likely to be sorely tested as US economic data continues to turn out weak. There was plenty of gloomy commentary along these lines last night â€“ Warren Buffett said that the US economy is in recession and that the contraction will be deeper and longer than people expect, Morgan Stanley produced a report saying that the credit crisis has a long way to go, and the founder of KB Homes said that the oversupply of US houses will take years to clear.
The New Zealand dollar held to fairly narrow ranges. Exporter interest took the NZD off its lows yesterday, and while medium-term traders were again seen establishing short NZD positions, this selling was easily absorbed by Asian buyers around 0.7840. The Australian dollar was also fairly subdued, with profit-taking on the NZD/AUD cross providing support above 0.8350. The euro was flat overnight, weighed down by softer German inflation figures. However, the pound had another good day against the euro, spurred by talk of M&A-related buying and repatriation by HSBC for a dividend payment.
German CPI inflation fell from 3.1% yr to 2.4% yr in April. This preliminary data will give the ECB some confidence that Euroland inflation may have seen its peak at 3.6% yr in March.
German consumer confidence rose from 4.8 to 5.9 in â€śMayâ€ť. Surveyed in early April, this result from GfK contrasts which other April surveys from Germany/ Euroland, which have mostly been weaker.
The European Commission revised down its growth forecast for this year from 1.8% to 1.7%, but next yearâ€™s forecast cut was steeper, from 2.1% to 1.5%. Meanwhile inflation forecasts for 2008 and 2009 were revised higher, to 3.2% (from 2.6%) and 2.2% (2.0%) respectively.
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 weekâ€™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.
Todayâ€™s merchandise trade figures for March are expected to provide one bright spot for the week. We are forecasting a $600m surplus (market median is $400m), which would make it one of the best months ever in dollar terms. Exports have received a huge boost from Tui oil exports, and high world dairy prices will swamp the effect of reduced volumes resulting from drought.
Michael Gordon, Market Strategist, Wellington, Ph: (04) 470 8266
With contributions from Westpac Economics and Westpac Strategy
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