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Friday May 23, 2008 - 00:01:49 GMT
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FX Research - Morning Report

Morning Report  Friday 23 May 2008

News and views
The market delivered its verdict on yesterday’s Budget
– more stimulatory than expected, and hence likely to delay any rate cuts by the RBNZ. We agree with this view, and have pushed out the expected timing of cuts to March next year – with the total fiscal stimulus now expected to be equivalent to 2.3% of GDP in the 2008/09 June year, the Budget has effectively provided the growth “insurance” that the RBNZ might have otherwise felt compelled to deliver, freeing them up to focus on the inflation risks.

The New Zealand dollar rose from 0.7780 to as high as 0.7890 and short-term interest rates have jumped by nearly 30 basis points, as traders were caught short in both markets. Much of the NZD buying was against the Australian dollar, with the cross bouncing from 0.8070 to 0.8220. The NZD gave back some of its gains overnight due to a resurgent US dollar, but still ended as one of the strongest of the major currencies on the day.

The US dollar managed a modest recovery after a sharp fall in recent days. Stronger jobless claims figures, while not markedly better than expected, got the ball rolling in the USD, and a fall in crude oil prices from record highs provided further support. US interest rates also finished the day 10-15 basis points higher, as the growing sense that the worst of the credit crunch is over has seen the market turn its attention back towards the inflation risks – which are substantial and widespread.

US initial jobless claims fell 9k to 365k, although in the prior week, continuing claims held at their four year highs. Both the level of claims (365k) and the 4 week average (373k) in the latest week, which coincides with the monthly non-farm payrolls survey period, were lower than in the April survey week (375k and 377k respectively). That doesn’t support the view that there will be a significantly larger fall in payrolls in the May report than April’s -20k (though we still expect a weak payrolls report).

The OFHEO house price series showed a -1.7% decline in Q1, for an annual decline of -3.1% yr. Not as weak as other surveys, but heading in the same direction – downwards.

Euroland industrial orders fell 1.0% in March. The decline in orders at the end of Q1 is further evidence supporting our view that Euroland economic activity will be weaker in Q2 than it was in Q1. We can speculate that the strong euro, higher oil prices and weaker US economy were all factors at play. The national data showed orders down -0.8% in Germany, -1.5% in Italy and -6.8% in France (possibly related to lumpy Airbus orders data), though there were offsetting gains in some of the smaller euro economies.

UK retail sales fell 0.2% in April, in line with our forecast, confounding the expectations of some analysts that sales might slump as much as -3% in the month. The official retail data just aren’t capturing the full extent of the weakness apparent in the private sector surveys. Late April sales of the new Grand Theft Auto 4 computer game were cited by the statistician as a supporting factor. All that said, retailing is clearly slowing. March-April saw the first back to back declines in retail since Dec-Jan in 2005-2006. Meanwhile, the CBI industrial survey for May maintained most of April’s stark weakness, though price pressures continued to build – that story pretty much describes most UK data these days! Another report showed a 1.4% drop in Q1 business investment, which is much weaker than expected. There could now be some risk of a downward revision to Q1 GDP.

The New Zealand economy is set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore. However, inflation is increasing coming back onto the market’s radar, along with a recognition that some central banks may be forced to address inflation pressures even with a weak economy – even in the UK, one of the most vulnerable of the major economies, interest rate markets now suggest the next move will be a hike. In light of this, the 75bp of easing priced in for New Zealand, though scaled back in recent days, is starting to look questionable. We wouldn’t be surprised if this reversal in interest rates and the currency runs a little further.

Upcoming Events
Country Release Last Forecast
23 May US Apr Existing Home Sales –2.0% –2.0%
Jpn Bank of
Japan Minutes
Eur May PMI Factory Adv 50.7 50.5
May PMI Services Adv 52.0 51.7

UK Q1 GDP Revision 0.4% a 0.4%
26 May NZ Apr Merchandise Trade NZDm –50 –150
US Memorial Day
Ger May CPI %yr (due 26-28th) 2.4% 2.8%

UK Late May Bank Holiday

Latest Research Papers/Publications
• NZ Budget 2008 Review (22 May)
• 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)
• NZ Weekly Forex Outlook (12 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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