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Tuesday May 20, 2008 - 21:19:53 GMT
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FX Research - Morning Report

Morning Report Wednesday 21 May 2008

News and views
The US dollar
resumed its slide against the major currencies, losing the most ground against the Europeans. Soaring commodity prices – including another record high of $129 for crude oil – and stronger than expected inflation figures weighed on US sentiment. The Dow closed 1.5% lower, and US interest rates slid about 5bp despite the worsening inflation outlook, suggesting that the market was left badly positioned as a result of the sharp rise in interest rates from mid-March.

US producer prices rose 0.2% in April, slightly less than forecast, but the core (ex food and energy) measure was stronger at 0.4%. As with the CPI, the seasonal adjustment turned April’s rise in gasoline prices into a decline, as the gain this year was less than normal. The stronger core rate was partly due to light truck prices jumping 1.3% and automobile prices up 0.4% (both following March declines). Given that the car-makers lifted their prices to dealers in April it is perhaps not surprising that auto sales fell so sharply last month. Even excluding autos the core would have risen 0.3%. With oil prices continuing to rise, sharply higher PPI outcomes are likely soon.

Fed vice chair Kohn said he expected the economy to firm up in H2 this year and that rates were well-calibrated to ease inflation and boost jobs. That’s pretty up-beat, though he acknowledged the Fed was sailing “in unchartered waters” and there was more than usual uncertainty associated with these forecasts.

The ZEW survey of 320 or so German analysts and economists delivered a bit of a mixed bag of results. Expectations for the German economy slipped but the current measure was stronger – possibly reflecting recognition that the strong Q1 GDP growth figure of 1.5% makes it harder to achieve positive growth in the current quarter. The same respondents, in contrast, reported slightly less weak expectations for Euroland, but a weaker current position. The bigger picture remains that the current measure for both Germany and Euroland is off its peak but still in comfortably positive territory, whilst expectations are at or close to fifteen-year lows.

The euro initially dipped on the figures, but quickly reversed course after the president of the ZEW said that he expects the ECB to raise rates in the near future if inflation holds around current levels. The euro rose to a three-week high of 1.5680, helped by ongoing talk of eastern European central banks diversifying their FX reserves away from the USD into the euro.

The Australian dollar rose sharply after the minutes for the RBA’s 6 May meeting revealed a more hawkish bias than suggested by last week’s Statement on Monetary Policy. The board spent some time discussing the case for a further rate hike, with less focus on downside risks to growth compared to the April meeting. The board also noted that “the rise of the exchange rate had been less than might have been expected given the strength of commodity prices”. The AUD rose to fresh highs above 0.96 after the statement, leaving it within striking distance of the post-float high of 0.9650 (dating back to 1984). Our official forecast has been for the AUD to reach parity early next year; the RBA’s continued hawkish stance raises the risk that it gets there earlier.

The stronger AUD hauled the NZD higher as well, though it continued to lose ground on the cross rate. The NZD retested yesterday’s high of 0.7770, but slipped back to 0.7740 by this morning. Medium-term traders appear happy to remain short the NZD, and it will probably take a move well above 0.78 before they start to cut positions.

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 rebound has been unconvincing, driven by questionable expectations of Fed rate hikes by year-end. Closer to home, 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 should give the NZD a chance to take a breather from its decline. However, we would still view any move beyond 0.78 as a better opportunity to sell.

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

Events Today
Country Release Last Forecast

NZ Apr Electronic Card Transactions –1.0% –
Apr Credit Card Transactions –2.7% –
Aus May Westpac Consumer Sentiment 87.4 –
Apr New Motor Vehicle Sales 1.0% 2%
US Apr 29-30 FOMC Meeting Minutes
Ger May Ifo Business Climate Index 102.4 102.0

UK May Bank of England MPC Minutes
Apr PSNCR £bn 12.7 –2.5
Apr Money Supply M4 %yr 11.9% 11.1%
Can Apr CPI 1.4% 1.5%
Apr CPI BoC Core Ex 8 1.3% 1.5%
Apr Leading Index flat 0.1%

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (19 May)
• 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)

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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