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Wednesday May 28, 2008 - 22:03:25 GMT
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FX Research - Morning Report

Morning Report Thursday 29 May 2008

News and views
Whippy overnight trading left the US dollar broadly higher against the other majors.
The day began with a sharp bounce in the USD against both currencies and commodities – crude oil fell by $2/barrel and gold lost $10/oz in a matter of minutes. While there was no clear catalyst, it may have reflected concerns about intervention in commodity markets, after the US Senate sent a letter to regulators saying that oil speculators are hurting the country, and urging regulation of speculative trading in futures. In any case, oil rallied later in the day and actually ended higher. Better than expected US durable goods figures gave a further boost to the USD and pushed US 10yr bond yields above 4% for the first time since January. But it also brought the market’s focus back to yield, and a few of the higher-yield currencies – AUD and GBP – recovered all of their losses.

The New Zealand dollar didn’t fare as well, with yield spreads narrowing over the day. The two-year swap rate, which rose by 40 basis points after the surprisingly stimulatory Budget last week, gave back 15bp of this yesterday on very little volume, suggesting that the market is still struggling to find the appropriate level. As a result, the NZD was knocked down to 0.7840 on the initial US dollar move and failed to claw back these losses overnight, significantly lagging the Australian dollar.

The 0.5% fall in US durable orders in April was not as bad as expected, thanks to a surprise 4.2% bounce in the core capital goods component after monthly declines right through Q1. Don’t get too excited though: this component jumped 4.5% in December last year, after a few weak months, only for business investment to fall in Q1 this year! Elsewhere there was as-expected weakness in aircraft (always volatile, but consistent with Boeing data for April) and yet another steep fall in autos, down for the fifth month running, although the recently concluded GM strike should see a bounce in this sector soon. Those declines explain the headline fall, with ex-transport having its best month since July last year. Shipments rose, including a modest 0.5% rise in core capital goods, and inventories posted a further gain, though slower than in March. So a mostly positive report, which suggests that the recession we suspect the US economy is now in is only shallow.

German inflation jumped from 2.4% yr to 3.0% yr in May. The jump in the preliminary German inflation report for May suggests that Euroland inflation will reverse most of its April fall from 3.6% yr in March to 3.3% yr. Also, the Euroland current account deficit grew to €15.3bn in March, the biggest seasonally adjusted deficit since the euro was introduced in 1999.

Minneapolis Fed Governor Stern noted that financial market conditions have improved in many areas, though considerable housing market adjustment was still to come. He saw unemployment rising (despite the fiscal stimulus, the effect of which he thought would be short-lived), but sounded less convinced of the impact of the slowdown on inflation. He noted that although inflation expectations have been  relatively well anchored so far, their behaviour from here would be shaped by how the Fed took back its interest rate cuts.

With an RBNZ cash rate review next week, and interest rate views in disarray after the Budget, few traders are looking to build positions in New Zealand markets at the moment, leaving the NZD in limbo for now. Beyond this, the NZD will still haveto run the gauntlet of Q1/Q2 data, which is likely to be soft on balance. However, inflation concerns are now coming to the fore around the world, and it’s not so 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

Events Today
Country Release Last Forecast

Aus Q1 CAPEX 5.1% 4.0%
CAPEX 2008/09 Intentions, 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 –
Jpn Apr Retail Sales %yr 1.0% 0.5%
Eur Apr Money Supply M3 %yr 10.3% 10.0%
May Retail PMI 41.8 –
Ger May Unemployment chg –7k –50k

UK May CBI Retail Survey –26 –
May GfK Consumer Confidence –24 –27
Can Q1 Current Account C$bn –0.5 3.0

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (26 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)

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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