Thursday May 15, 2008 - 21:52:22 GMT
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Westpac Institutional Bank - www.westpac.co.nz
FX Research - Morning Report
Morning Report Friday 16 May 2008
News and views
The New Zealand dollar lost ground after yesterdayâ€™s shocking retail sales figures, but reclaimed it all overnight. Sales volumes were much weaker than expected at -1.2% for the quarter â€“ weak auto sales were the main factor, reflecting reduced access to credit and consumerâ€™s increasing caution about big-ticket items â€“ but there was plenty of weakness to be found in the retail sector as well. The NZD fell from 0.7610 to as low as 0.7550 after the data, and remained heavy though most of the overnight session. However, profit-taking on short NZD positions, particularly against the AUD, saw the currency rebound sharply to 0.7640 late in the day.
The Australian dollar was more of a steady performer, rising from 0.9300 to around 0.9420 over the day. Stronger metals prices, including a $20/oz bounce in gold, gave the currency further impetus.
The US dollar was generally weaker overnight, as the relative data flow started to turn against the US again. US industrial production fell 0.7% in April, after a downwardly revised +0.2% in March and versus expectations of -0.3%. There was broad weakness evident in April industrial production with only utilities registering a small gain. April capacity utilization declined to a reported 79.7%, well below the consensus forecast of 80.1%. The Fed NY manufacturing index fell to -3.2 against forecasts of a flat reading, though the Philadelphia survey rose by more than expected to -15.6. And the NAHB homebuilders index slipped to 19 in May, having stabilised around 20 in recent months.
In contrast, European data was relatively solid. Eurozone GDP rose a provisional 0.7% in Q1, much better than market expectations of 0.5%. German GDP provided the greatest surprise with a quarterly gain of 1.5%, the biggest in 12 years. In contrast, output growth in Spain was noticeably weaker than in previous quarters, rising by just 0.3%, while Italian preliminary GDP is not scheduled for publication until 23 May.
Currency markets didnâ€™t all go to plan though. Eurozone CPI was confirmed at 3.3%yr in April, but the core measure fell to 1.6%yr, its lowest since December 2006, against forecasts of 2.0%. The ECB focuses on headline rather than core inflation though, and indeed itâ€™s increasingly difficult to justify excluding food and fuel prices from as â€˜volatileâ€™ items. Nevertheless, the euro lost its momentum after these figures, and ended the day slightly down from its opening levels.
Lower interest rates also undermined the USD. Ten-year bond yields fell 10bp for the day, while short-term rates lost around 20bp after an early tick higher. The soft US data undoubtedly would have contributed to this, but most of the moves came well after the data was released. The fall was sparked by rumours that the Fed would expand one of its liquidity facilities, and by a US think-tank report suggesting that the market was wrong to price in Fed rate hikes by year-end; however, the size of the moves probably say more about how the market is positioned, following a sharp rise in US rates since the Bear Stearns bailout in mid-March (short-term rates are up more than 100bp since then).
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 RBNZâ€™s recent dovish statements. We think that NZD weakness will be more clearly captured through the trade-weighted index, with the US dollar still struggling to make a convincing recovery.
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 16 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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