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Monday June 2, 2008 - 21:07:06 GMT
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Foreign Exchange Research - Morning Report

Morning Report  Tuesday 3 June 2008

News and views
It was a fairly listless overnight session for the New Zealand dollar. The currency openedoffshore dealings around USD0.7820 and saw an early spike to USD0.7868 but it ran intogood offers and slipped back into a USD0.7830/55 range for the remainder of offshore trading. The currency was relatively muted despite large swings in other asset markets overnight. Risk appetite took a hit with the Dow Jones shedding 170pts overnight led by weakness in the financials after S&P downgraded the debt ratings for several large banks. Sentiment was already on the backfoot following the earlier announcement from UK’s Bradford and Bingley (a major buy-to-let lender) that the outlook for the UK property market remains grim. The RBNZ’s OCR Review later this week and a light bid tone to the NZD/AUD cross overnight probably helped insulate NZD. The NZD opens local trading at USD0.7850.

The Australian dollar was not as immune as the NZD overnight. The AUD opened offshore trading on the backfoot in the wake of a disappointing earlier retail sales release (-0.2% vs +0.2% expected), shedding about 20pts in early trading. But long term buyers just ahead of USD0.9500 stepped up and the AUD rebounded all the way back to 0.9560/70. These gains proved shortlived though with deepening US equity market losses sending the AUD back toward 0.9530/40 in afternoon NY trading.

USD/JPY fell hard overnight, closely tracking US equity markets. From offshore opening levels around 105.40 USD/JPY tumbled to lows near 104.00.

EUR/USD traded through a 100pt range overnight but finished the session close to flat. Early weakness from around 1.5560 to lows of 1.5490 coincided with weaker oil prices but as US markets opened and equities slipped EUR recouped its losses. News that S&P cut the debt ratings of several US banks saw EUR spike to 1.5590 but it finished the session well off these highs at 1.5541.

US May manufacturing ISM rose to its highest since January, still below the neutral 50 level but at 49.6, only just. Indeed with production comfortably back above 50 and orders up more than 3 pts (but still just below 50) the overall report suggests manufacturing is stalled, but not much worse than that. The orders recovery loosely backs the strong capital goods component of the April durable goods report. Exports remain the standout activity component of the ISM, thanks to the weak US dollar and continued growth in many US trading partner economies. Jobs remain the weak point. The high prices component is of course a reflection of rapid commodity price gains.

US construction spending was weak at the start of April though held up somewhat by continued gains in the non-residential sector, which suggests that the upward revision to that component of Q1 business investment (revised from –6.2% to +1.1% annualised last week) might still have some legs heading into Q2.

Euroland factory PMI was revised up slightly from 50.5 to 50.6 in May. That is still a new cyclical low for the series.

UK factory PMI slipped further in May to the “neutral” 50 level, though history actually shows that a reading of around 53 is consistent with flat activity as recorded by the official industrial production data. So this result implies the factory sector is already slipping into recession.

UK mortgage lending figures were dire: the number of new loans fell to just 58k, lower even than at any time during the housing slump in the early 1990s. That reflects, we suspect, both subdued demand for new mortgages, and rationed supply due to the credit crunch, and is likely to put more downward pressure on house prices, which are already falling in annual terms. Consumer credit growth slowed too. In the past data like these would have had the Bank of England cutting rates, but this week a cut seems unlikely, given high headline inflation, rising inflation expectations and the Bank’s stated acceptance that the economy needs to slow to bring inflation back into line with the 2% target by the end of this decade.

The NZD is in a holding pattern this week ahead of the RBNZ announcement on Thursday. On that, our economists view the risks as being skewed towards a more hawkish tone, which would likely see the NZD higher, at least on the day.

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

Events Today
Country Release Last Forecast

Aus Apr Dwelling Approvals –5.7% –2.0%
Q1 Current Account Balance, AUDbn –19.3 –19.7
Q1 Net Exports Contribution to GDP, ppts –1.0 –0.7
Q1 Public Spending 2.4% 0.9%
RBA Policy Announcement (
2:30pm) 7.25% 7.25%
US Apr Factory Orders 1.3% 0.5%
May Auto Sales mn ann’lsd 14.4 14.3
Eur Apr PPI %yr 5.7% 6.2%
Q1 GDP Revision 0.7% a 0.7%

UK May PMI Construction 46.1 45.8
May Consumer Confidence 70 65

Latest Research Papers/Publications
• RBNZ MPS Preview (29 May)
• 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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