Thursday May 1, 2008 - 21:44:28 GMT
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Westpac Institutional Bank - www.westpac.co.nz
FX Research - Morning Report
Morning ReportÂ Friday 2 May 2008
News and views
The New Zealand and Australian dollars gave back yesterday's gains as the US dollar rebounded overnight. The NZD drifted down to 0.7740 but held above yesterday's lows, while the AUD fell back towards 0.93. The AUD in particular was hurt by sliding metals prices, with copper down 5% and gold continuing its slide since mid-March, now 17% below its highs. A 5.7% fall in Australian building approvals reinforced the sense that the RBA's quick-fire rate hikes in recent months are having the desired effect. Retail sales today should provide further evidence of this - we expect a third straight monthly decline in spending.
The US dollar made solid gains against the major currencies, though with many northern hemisphere markets closed for May Day, liquidity was unusually thin. The move higher most likely reflected a confidence boosting fall in crude oil prices, which fell to $111 after Exxon said that Nigerian workers had ended a strike and would resume production soon. The Dow closed above 13,000 for the first time since 3 Jan, but interest rate markets were less convinced, ending the day just a few basis points higher.
US data was none too encouraging, pointing to downside risks for tonight's payrolls report and beyond. Initial jobless claims rebounded 35k to 380k last week, and continuing claims in the prior week rose above 3 million to a four year high. With no special factors at play, these numbers point to ongoing deterioration in the labour market through April. The US factory ISM remained in contractionary territory at 48.6, with all key activity indices sub-50 except for exports, which continue to benefit from the weak US dollar and economic growth in many US trading partners. The jobs reading was especially soft at 45.4. Also, Challenger reported that corporate layoff announcements jumped from 53.6k to 90.0k in April. These numbers are not seasonally adjusted but this is a sizeable step higher.
US construction spending - especially residential - was painfully weak in March, down 1.1%, but there were substantial upward revisions to history. These will not have been included in the advance estimate of Q1 GDP, so there is some risk of an upward revision in four weeks' time.
US personal spending and income quarterly totals were revealed in yesterday's GDP report. The monthly data showed modest nominal gains in both though in real terms, March spending was up just 0.1% and disposable income growth was flat. The core PCE deflator showed a weak 0.2% gain afterrounding; the headline PCE rose 0.299% for a 3.2% annual rate.
The UK factory PMI gave up some of its recent recovery, falling to 51.0 in Apr, and the orders sub-index remained below 50 (at 49.5), suggestive of further weakness ahead. If this survey accurately forewarns of renewed weakness in the official production statistics, then GDP growth in Q2 will slow to below Q1's subdued 0.4% pace.
The Bank of England released its latest financial stability report. It described the correction from the credit boom as "unavoidable, protracted and difficult". But it also determined that "the most likely path ahead is that confidence and risk appetite will return gradually in the coming months".
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 looking towards an end to the Fed easing cycle.
Michael Gordon, Market Strategist, Wellington, Ph: (04) 470 8266
With contributions from Westpac Economics and Westpac Strategy
Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 2 May 2008. 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 Westpacâ€™s financial services guide by calling +612 9284 8372, visiting www.westpac.com.au 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. Â© 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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