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Tuesday May 27, 2008 - 22:12:28 GMT

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FX Research - Morning Report

Morning Report Wednesday 28 May 2008

News and views
New Zealand dollar held its ground against a stronger US dollar, trading either side of 0.7900 for most of the overnight session. Fading expectations of RBNZ rate cuts in the near future, which have driven the NZD’s recovery in the last fortnight, were underscored by yesterday’s data. The NBNZ business confidence survey showed activity indicators remaining around recessionary levels as the market expected, but inflation expectations and pricing intentions rose further – to levels more consistent with a sharply lower currency, not one within a few cents of record highs. The RBNZ’s survey of business forecasters also found that expectations of inflation two years ahead have risen to 2.9%, testing the top of the RBNZ’s inflation target range.

The US dollar regained ground against the other majors, buoyed by stronger equity markets and a fall crude oil prices as expected supply disruptions failed to pan out. US activity data was mixed but inflation concerns remained at the fore, with US interest rate markets now pricing in nearly 100bp of rate hikes over the next year. The euro was knocked lower early on by rumoured central bank selling, and continued to struggle even after more hawkish comments by ECB officials. The yen was steadily sold on the strength of the US dollar and residual demand for carry trades.

The US Conference Board consumer confidence survey fell to 57.2 in May from 62.8 in April, the lowest level in more than 15 years. The drop in the already-low future expectations reading to just 45.7 left this measure at its lowest since December of 1973, when the public was shaken by war in the Middle East and the first OPEC oil embargo. It appears that the first of the tax rebate cheques have done nothing to boost confidence so far, nor has the growing sense on Wall Street that the worst of the credit crisis is over filtered through to households. Another part of the survey probably explains why: one-year ahead inflation expectations soared to 7.7% in May, well ahead of the all-time high of 6.8% seen both last month and in September 2005 in the aftermath of hurricane Katrina.

US new home sales rose 3.3% in April. While the monthly change beat market forecasts, a large downward revision to March left the trajectory of sales much as expected. Median sale prices were surprisingly perky at +1.5% yoy, but this series is extremely volatile, coming off a 14% yoy fall in the previous month.

US S&P/Case-Shiller March house prices fell 14.4% from a year earlier, the largest annual fall since the figures were first published in 2001. Prices dropped 2.2% in the month on top of a 2.6% decline in February. The index is a median of 20 metropolitan areas.

Fed Governor Yellen noted that current interest rates were appropriate, and that low interest rates plus fiscal stimulus should boost the economy. While saying that rates would need to be raised “at some point”, she sees cuts as “down the road”. She cautioned that more weak data won’t necessarily mean more rate cuts.

German Q1 final GDP confirmed the preliminary read of 1.5%. Private consumption was a weak 0.3% following a 0.8% decline in Q4, but public consumption jumped 1.3%. Machinery and equipment investment and construction investment were both strong, while stock changes added 0.7% to growth. Net exports detracted 0.2%. A slowdown in Q2 is highly likely, given the stock building contribution.

ECB member Weber said that “if inflation risks increase further and the tensions on financial markets simultaneously ease, there would be a clear need” for further rate hikes. Fellow member Liebscher also said that inflation leaves no room to relax interest rates.

UK new mortgage approvals hit 38.7k in April, from 35 in March. Net mortgage lending increased by 5.4bn in April (vs. 4.2bn in March), but with approvals down 39% yoy, things are going only one way.

The New Zealand dollar will remain under pressure as it runs the gauntlet of soft economic data over coming months. However, inflation concerns are now coming to the fore around the world, and it’s less obvious that the NZD should significantly underperform on this basis – if anything, New Zealand is better positioned than most economies, due to the tight monetary conditions already in place. The 75bp of easing priced in for the next year, already scaled back in recent days, still looks questionable when markets elsewhere are pricing rate hikes even for vulnerable economies.

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

Upcoming Events
Date Country Release Last Forecast

28 May Aus Mar Westpac-MI Leading Index 3.3% –
Q1 Construction Work Done –1.0% 3.0%

US Apr Durable Good Orders –0.3% –2.0%
Fedspeak: Stern
Jpn May Small Business Confidence 43.1 –
Eur Mar Current Account Balance €bn 4.3 –
29 May Aus Q1 CAPEX 5.1% 4.0%
CAPEX 2008/09 Intenti AUDbn 78.5 –

US Initial Jobless Claims w/e 24/5 365k 375k
Q1 GDP Revision 0.6% a 0.8%
Apr Help Wanted Index 19 –

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

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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