Thursday May 8, 2008 - 21:32:14 GMT
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Westpac Institutional Bank - www.westpac.co.nz
FX Research - Morning Report
Morning Report Friday 9 May 2008
News and views
The New Zealand dollar fell sharply yesterday after the shockingly weak jobs figures for the March quarter. Employment fell 1.3%, the largest quarterly fall in 19 years, suggesting an even quicker slowdown in the economy than we had expected. The market quickly moved to anticipate earlier rate cuts by the RBNZ - short-term interest rates fell by as much as 0.25%, and the currency fell from 0.7820 to 0.7720 after the release. While the currency didn't make much more progress lower overnight, it tended to lag the other major currencies as they strengthened against the US dollar.
The Australian dollar, in contrast, was buoyed by its own employment figures, which rose strongly for the 18th straight month. The AUD suffered some guilt by association after the NZ employment figures, dropping from0.9420 to 0.9350, but more than made up for this after the Australian data. The NZD/AUD continued lower to 0.8180, its lowest level since August 2006.
The US dollar generally slipped against the other majors as some of the recent optimism bled out of the market. US interest rates fell after the SEC said that it would require Wall Street firms to disclose capital and liquidity positions, raising concerns that this could uncover new problems. Insurer AIG reported a larger than expected $7.8bn loss and had its credit rating downgraded by S&P. Ten-year bond yields fell for a second day to 3.77%, down 20bp from their peak.
The European Central Bank left its repo rate unchanged at 4.0%. At the press conference, ECB president Trichet reiterated that "The firm anchoring of medium to longer-term inflation expectations is of the highest priority. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We believe that the current monetary policy stance will contribute to achieving our objective." Hence we no longer expect the ECB to cut rates at its June meeting. Based on past form, we would have had a clear warning by now that a cut was imminent. On the data front, German industrial production fell 0.5% in March, its first decline in four months.
The Bank of England left rates unchanged at 5.0% following this week's policy meeting. As usual when rates are on hold, no statement was issued. However we expect the BoE's quarterly inflation projections, to be published on May 14, will show inflation heading modestly below the 2% target two years hence, paving the way for a June cut and subsequent further easing. We suspect that the BoE is worried that back-to-back rate cuts (they last cut in April) would downplay the near-term inflation risks that a majority on the policy committee still see as serious. Nevertheless we see the BoE cutting every two months, to 4.25% by Q4 this year, with risks around that view skewed to the downside.
US initial jobless claims fell 18k to 365k last week, maintaining the recent see-saw pattern. The trend seems to have settled around 370k new claims per week, consistent with ongoing payroll job losses. Continuing claims remain close to the four-year high reached in mid April. In other news, wholesale inventories posted a relatively rare fall of -0.1% in March, which is consistent with our view that stocks will be a drag on growth heading into Q2. But the picture is confused by a sharp rise in wholesale sales which suggests the stocks rundown was involuntary (and hence could be reversed in coming months). Also the monthly chain store sales report showed a 3.6% yr gain in April compared to -0.5% yr in March; stronger than the weekly reports through the month implied.
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, theNZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile supported by weak economic data and the RBNZ's recent dovish statements. However, this underperformance is more likely to be captured against a basket of currencies, with the US dollar still struggling to rise convincingly against the higher-yielding currencies in particular.
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 9 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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