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Wednesday May 14, 2008 - 22:14:53 GMT
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FX Research - Morning Report

Morning Report  Thursday 15 May 2008

News and views
New Zealand dollar drifted lower against the US dollar, but was again generally sidelined in favour of the major currencies. The NZD traded below 0.76 for the first time since January as the USD initially tracked higher, but softer than expected US inflation figures saw the market reverse course later in the day.

The Australian dollar was dented by softer than expected wages data yesterday, slipping from 0.9420 to a low of 0.9310. As in New Zealand, the Australian wages figure was once a stable series that has become more volatile recently, rising just 0.7% in Q1 after a 1.1% gain in Q4. The NZD/AUD cross reached a 21-month low around 0.81 before the data but recovered back to 0.8150.

The US dollar started out stronger, reflecting the upward march in US interest rates in recent days. However, both gave back their gains after the softer CPI figures. The euro briefly traded below 1.54, but reported central bank demand provided support over the rest of the day. The yen continued to soften, though talk of stop-loss buyers of USD/JPY above 105 failed to eventuate.

The US CPI was softer than expected in April, with the core rate up just 0.1% and the headline rate up 0.2%. Energy prices were flat, which seems surprising given we know that oil prices hit new records and gasoline rose sharply, but the CPI is seasonally adjusted and gasoline prices typically rise in April (ahead of the summer driving season), so the gain was ‘adjusted away’. Gasoline prices actually fell 2.0% in the CPI although this was offset by rising gas prices which lifted the home energy component 2.2% leaving overall energy flat. Food prices rose steeply through, up 0.9%. In three-month annualised terms, the core CPI was up just 1.2%, compared to the annual core rate of 2.3%, indicating that inflation trends in recent months have been quite benign despite significant price pressures in commodity markets. If inflation data print similar outcomes in coming months and activity data remain weak, the Fed might become comfortable with the idea of cutting rates further.

The Bank of England’s quarterly inflation report projected inflation rising towards 4% later this year, then falling towards the 2% target but not hitting it until the second half of 2010, a little beyond the two-year forecast horizon. That is on the basis of market pricing (calculated by the BoE earlier this month) that implied two 25bp cuts by early 2009. The constant rate assumption central projection had inflation falling to the 2% target by late 2009. Hence the BoE’s central projections imply that rates will be cut by something more than nothing but by less than twice over the next three quarters considerably less than what the market was pricing prior to this week’s upside inflation surprises.

UK interest rates rose sharply, all but writing off further rate cuts this year. However, the pound failed to get much traction – the BoE report still pointed to a significant slowdown in growth this year, with little prospect of further BoE support due to the inflation outlook. Other UK data was also on the soft side: jobless claims rose 7k in April, and due to a 4.8k upward revision to March, UK unemployment has now risen for three months running. Earnings growth accelerated to 4% in March, but is still comfortably below the BoE’s 4.5% worry threshold.

Euroland industrial production fell 0.2% in March. Consistent with national data, the Euroland IP figures confirmed the loss of momentum in economic activity at the end of Q1. We still expect Q1 GDP growth (due tonight) to have accelerated from 0.4% in Q4 to 0.5%, but expect that Q2 GDP growth will be somewhat slower, helping to pave the way for an eventual cut in interest rates by the ECB.

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. Today’s retail sales figures are expected to add to this view, though there is a low degree of confidence around our forecasts. Spending indicators point to a weak read for March, potentially compounded by a shorter than usual March (due to the early Easter break) following a longer than usual February (leap year). However, general price increases over the March quarter were not as great as for fuel and food, suggesting 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, compared to market forecasts of a 0.2% fall.

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

Upcoming Events
Date Country Release Last Forecast

15 May NZ Q1 Real Retail Sales 0.3% 0.4%
Mar Retail Sales –0.7% –0.2%
Aus Q1 Full-Time AWOTE %qtr 0.6% –
RBA Monthly Bulletin
RBA Governor Stevens speaks

US Initial Jobless Claims w/e 10/5 365k 375k
May NY
Fed Empire State Index 0.6 –10
Philadelphia Fed Index –24.9 –15.0
Mar TIC Data $bn 64.1 65.0
Apr Industrial Production 0.3% –0.5%.
Apr Capacity Utilisation 80.5% 80.0%
May NABH Housing Market Index 20 20
Fedspeak: Bernanke and Evans
Jpn Mar Machinery Orders –12.7% –3.0%
Eur Apr CPI (F) %yr 3.6% 3.3%
Q1 GDP 0.4% 0.5%
Ger Q1 GDP 0.3% 0.4%
Can Mar Manufacturing Shipments 1.6% –1.0
16 May NZ Q1 Producer Output Prices 1.5% 1.2%
Q1 Producer Input Prices 1.3% 1.0%
Aus RBA Assistant Governor Debelle speaks


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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