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FX Research - Morning Report

Morning Report   Monday 5 May 2008

News and views
The US dollar
was given a boost after some better than expected jobs figures. The April payrolls decline of 20k was much less than we expected, and the separate household survey recorded a 362k gain, dragging the unemployment rate down from 5.1% to 5.0%. To be sure, there were some pockets of real weakness, as shown by the industry breakdown, with construction and retail shedding jobs at a faster pace than in March, and manufacturing posting another sizeable loss, in line with February and March. But in services, up 90k overall, compared to virtually nil jobs growth in the prior three months, one industry stood out. Professional services (lawyers, accountants and the like) saw 39k more jobs in April, a steep turnaround from the losses seen right through the first quarter. If that industry had replicated its 44k March decline in April, total payrolls would have fallen 103k. In other words, the ‘surprise’ was concentrated in one sector, rather than the overall report being less weak than in March.

While the USD was stronger post the number, this was more against the lower-yielding currencies. The euro dropped from 1.5480 to 1.5370, while USD/JPY easily broke through the expected resistance at 105 to finish the day at 105.40. The market seems to have read the jobs figures as equally good for growth trades as for the US dollar; the higher-yielding currencies such as NZD and AUD largely held their ground after the data, and US equities rose strongly at the open, though they gave back most of their gains by the close.

The New Zealand dollar was initially supported by traders unwinding short positions against the AUD; the cross rate reached one-week highs around 0.8390, though it settled back to 0.8350 by the end of the day. The NZD traded as high as 0.7840 after the US data, but it remains well within its recent ranges.

Prior to the jobs data, the Fed (in conjunction with the European Central Bank and the Swiss National Bank) expanded its liquidity provision measures, by increasing the biweekly term auction facility from $50bn to $75bn, and widening the collateral primary dealers can pledge to include all AAA asset-backed securities, in addition to mortgage backed paper. US yields dipped on the announcement, offsetting some of the reaction to the jobs figures and leaving 10yr bond yields 9bp higher for the day.

US factory orders rose 1.4% in March. The previously published durables component was revised up from –0.3% to 0.1%; non durables were boosted by an 8.7% jump in petroleum, which is mostly due to higher prices. The non-durables bit is the new information and as such this does not really tell us much we didn’t know about the economy.

European activity data remained on the soft side. The Euroland factory PMI was revised down slightly from 50.8 to 50.7 (a new cyclical low), confirming that manufacturing started the second quarter in poorer shape. German retailing ended the first quarter with sales drifting lower. The annual rate looks very weak at –6.3%yr but that is typical volatility.

UK housing data flow continues to paint a steeply deteriorating picture. On yet another measure (HBOS), house prices are now declining in annual terms, and construction activity, as measured by the PMI, fell to its lowest since 1998. The UK economy is heading into a period of much slower economic growth that will ultimately allow the Bank of England to cut rates further this year. However, don’t expect a cut at this week’s review – we suspect a majority on the policy committee will focus more on accelerating inflation, likely to hit 3% in the next month or so.

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 the RBNZ’s dovish 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.

Labour market figures this week are likely to be a relative bright spot, reflecting the residual strength in the economy last year. We expect a 0.8% in private sector wages (today), bringing the annual rate to a record high of 3.6%, while employment (Thurs) is expected to grow just enough to keep the jobless rate at 3.4%.

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

Upcoming Events
Date Country Release Last Forecast

5 May NZ Q1 Labour Cost Index priv ord 1.1% 0.8%
Q1 QES priv sector ord time 0.9% 1.1%
Apr ANZ Comm Price Index 2.0% –
Aus Apr TD-MI Inflation Gauge 0.4% –
Apr ANZ Job Ads –0.7% –
Q1 House Prices (ABS) 3.2% 0.2%

US Apr ISM Non Manufacturing 49.6 48.0
Eur May Sentix Investor Confidence 4.1 3.9

UK Markets Closed, Bank Holiday – –
6 May Aus Mar Trade Balance AUDbn –3.29 –2.6
RBA Policy Announcement 7.25% 7.25%

Latest Research Papers/Publications
• Q1 labour market preview (1 May)
• NZ housing demand/supply balance (28 April)
• NZ Weekly Forex Outlook (28 April)
• RBNZ OCR Review (24 April)
• NZ Economic Overview April 2008 (21 April)
• NZ Weekly Forex Outlook (21 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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