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FX Research - Morning Report

Morning Report  Monday 19 May 2008


News and views
US dollar weakness resumed on Friday night
as nervous speculators cut their long USD positions. While the data was mixed at best – better than expected housing starts but weaker consumer confidence – the stronger market reaction to the latter number suggests that much of the rise in the USD in recent weeks has been driven by speculative long positions. Stronger commodity prices also undermined the USD. Gold rose $20/ oz, more than reversing its weakness earlier in the week, and crude oil reached another record high of $127.80/barrel after Goldman Sachs (one of the first to predict oil over $100) increased its forecast for the second half of the year from $107 to $141. The weaker US dollar saw the Australian dollar storm to a new 24-year high of 0.9560.

The New Zealand dollar was reluctantly dragged higher, with little action until the AUD had broken through the previous day’s highs. But from there it made solid gains, ending at a one-week high of 0.7740. Short-term traders remain short the NZD against the USD, and even more so against the AUD, where the downward momentum on this cross hasn’t stalled yet.

The University of Michigan consumer sentiment survey fell a further 3pts to 59.5 in early May, its lowest level since early 1980. It seems that the arrival of the first of the tax rebate cheques hasn’t materially lifted the mood. The current conditions measure slipped the most but expectations also deteriorated, and inflation expectations rose. Higher gasoline prices ($4 per gallon in some places, though the national average was $3.72 in the week of 12/5 according to the Dept of Energy) were clearly a factor at play.

US housing starts jumped more than 8% last month, but that reflected a 36% bounce in multiples (condos), reversing a 35% fall in March. Single family starts fell further, down nearly 2% in April, though that was their smallest fall since June last year. Permits to build houses rose 5% (including single family permits up 4% - their first rise in two years!), but at 978k annualised, they are still running below the pace of starts at 1032k, which suggests that starts weakness could resume next month. Overall, the data were not as weak as we were expecting, but neither do they make a convincing case that the housing slump might be finding a bottom. Recall that new home sales continue to slump (having risen just once, in October, in the past year).

State payrolls figures for April summed to a –151.3k loss of jobs nationally, compared to the –20k national payrolls decline in the April employment report two weeks ago. Now, the state payroll data are seasonally adjusted individually, so there is no reason for them to sum to the same total as the national figure in any given month. But in some cases they may include extra returns which will make their way into the revised national figure in the subsequent month’s payrolls release. In practise, although the Bureau of Labor Statistics discourages using the state data to calculate national figures, they often pick the direction of subsequent revisions. We would not be surprised to see April’s payrolls result revised lower, which would be consistent with the very weak hours worked figures in April.

The Euroland trade balance unexpectedly slipped back into deficit in March, as export weakness (down 2.9%) contrasted with flat imports. The €2.4bn deficit could be evidence that the strong euro is impacting on the competitiveness of European firms.

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 the major currencies overall. However, we suspect this will be more clearly captured through the non-USD crosses – the US dollar’s recent rebound has been unconvincing, driven by a dubious expectation of Fed rate hikes by year-end. Locally, the fact that lenders are passing on lower funding costs to customers is also significant, as it counters a fairly widespread view that the RBNZ will need to cut rates hard and fast to get any traction. Along with a relatively light data calendar this week, this could see the market reassess the timing and extent of the easing cycle that is currently priced in, leading to a shortlived rally in NZD that would offer better opportunities to sell.

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

Upcoming Events
Date Country Release Last Forecast

19 May Aus Apr Merch Imports, AUDbn 16.8 –
US Apr Leading Index 0.1% –0.2%

UK May Rightmove House Prices -0.1% –
20 May NZ Apr External Migration ann. 4,678 4,624
Aus RBA Minutes of May Meeting
Secretary to the Treasury, Dr Ken Henry speaks

US Apr PPI 1.1% 0.6%
Apr PPI Core 0.2% 0.2%
Jpn Bank of
Japan Meeting 0.50% 0.50%
Mar Tertiary Activity Index –1.7% 0.5%

Latest Research Papers/Publications
• Housing equity withdrawal and its impact (16 May)
• NZ Budget 2008 Preview (15 May)
• NZ Q1 Retail Sales Review (15 May)
• NZ Interest Rate Focus (13 May)
• NZ Weekly Forex Outlook (12 May)
NZ Q1 HLFS Review (8 May)
• ETA of ETS delayed (6 May)

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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AA JP- Bank of Japan
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