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Tuesday May 13, 2008 - 22:25:27 GMT
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FX Research - Morning Report

Morning Report  Wednesday 14 May 2008

News and views

The New Zealand dollar lagged the other major currencies again overnight, but was generally sidelined in favour of more important themes offshore. The NZD stuck to a narrow range through most of the day and briefly popped back above 0.77, before succumbing to a stronger US dollar and slipping to 0.7640 by this morning.

The Australian dollar dipped slightly after last night’s Federal Budget. The Budget delivered the promised tax cuts, but these were offset by larger than expected spending cuts, leaving it slightly less stimulatory (and hence less inflationary) than expected. The withholding tax rate was cut from 30% to 22.5%, which should encourage foreign investors and may prove to be AUD-positive over the longer term. The AUD slipped from 0.9440 to 0.9400 after the Budget, but largely held its ground against the USD for the rest of the overnight session.

The US dollar rose after US retail sales printed stronger than expected – continuing a run of data that have beaten forecasts even if they remain weak in outright terms. The USD also benefited from a sharp move in yields in its favour – two-year Treasury yields rose to 2.47%, their highest close since January. Renewed speculation about whether money market rate fixings have been artificially low helped to drive short-term rates 15-20bp higher. Comments from Fed officials were a mixed bag, with Hoenig and Fisher highlighting inflation concerns, but Chairman Bernanke noting that financial markets are “far from normal”, and Stern noting that the US is unlikely to avoid recession (an interesting view given that neither Q1 or Q2 GDP are expected to print negative).

US retail sales fell 0.2% in April due to known weakness in auto sales, but there were pockets of unexpected strength elsewhere in the report. Building materials jumped 1.9% and electronics rose 1.4%, both surprises given that the housing market is in free-fall and anecdotes suggest that discretionary spending (such as on TVs and stereos) is being curtailed as household income growth dwindles. Along with upward revisions to sales in Q1, April’s 0.5% rise in core retailing looks quite decent. This could reflect some pre-spending of the tax rebates which started to be paid in the last week of April. Or lower auto sales could have freed up cash for spending on other items. Still, three month annualised core retail spending of 1.3% implies that sales are not keeping up with inflation (i.e. are declining in real terms), so the report is still weak – just not quite as soft as we were expecting.

US business inventories were held to a 0.1% March gain by a 0.5% fall in the retail component, on top of a known 0.1% fall in wholesale and 0.9% rise in factory stocks. The inventories contribution to Q1 GDP growth will need to be shaved a little lower as a consequence but there will be offset which will see consumer spending revised a little higher, and also from net exports (recall the narrower trade deficit reported last week). The net result is that Q1 GDP is likely to be revised a little higher compared to the 0.6% annualised advance result (revision due 29/5). In other news, import prices continued to soar in April, up 1.8%, boosted not only by a 4.4% jump in imported petroleum, but also by rising prices for other imports – a function of the weaker US dollar.

UK consumer prices rose 3% in April, even stronger than our top of the range 2.8% forecast. Food prices (up 6.9% yr) and utilities (9.1% yr) were expected to be drivers but household goods inflation jumped from 0.7% yr to 2.2% yr implying less discounting and other sectors showed upward pressure which more than offset ongoing declines in apparel. This result has alarmed financial markets which have sharply downgraded expectations for further BoE rate cuts this year. But other UK data reports were very weak, emphasising the difficult decision the BoE MPC must make each month. House prices are falling according to a net balance of more than 95% of all building surveyors. And the BRC reported another decline in same store sales in April, indicating slumping consumer spending.


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 supported by weak economic data and the RBNZ’s recent dovish statements.

Locally, the main event this week is the retail sales data on Thursday. Electronic card transactions point to a small fall for the month of March, continuing the weak trend. However, general price increases over the March quarter were not as high as for fuel and food, meaning that at least some of the nominal growth in spending in Q1 was due to a rise in volumes – we expect a 0.4% gain for the quarter.

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


Events Today
Country Release Last Forecast

Aus Q1 Wage Price Index %qtr 1.1% 1.1%

US Apr CPI 0.3% 0.4%

Apr CPI Core 0.2% 0.2%

Fedspeak: Rosengren, Kroszner, Lockhart

Jpn Apr Corp. Goods Prices %yr 3.9% 3.6%

Mar Current Account ¥bn 1461 1800

Eur Mar Industrial Production 0.3% –0.3%

UK Apr Unemployment ch’ –1.2K flat

Bank of England Qtrly Inflation Report


Latest Research Papers/Publications

• NZ Interest Rate Focus (13 May)

• NZ Weekly Forex Outlook (12 May)

• NZ Q1 HLFS Review (8 May)

• ETA of ETS delayed (6 May)

• Q1 Wage Review (5 May)

• NZ Weekly Forex Outlook (5 May)

• Q1 labour market preview (1 May)

• NZ housing demand/supply balance (28 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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