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Wednesday June 4, 2008 - 20:36:02 GMT
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Foreign Exchange Research - Morning Report

Morning Report  Thursday 5 June 2008

News and views
The New Zealand dollar
rose modestly in early overnight trading but relinquished those gains fairly easily though afternoon NY trading in the wake of yet more hawkish commentary from Fed Chair Bernanke. Early offshore trading saw the NZD grind up from opening levels around USD0.7800 to around USD0.7840 with a solid bid in AUD giving NZD the cover for a test higher. But, Chairman Bernanke was the focal point in once again, with his comments that inflation is “significantly higher than we would like”. Newswires as usual failed to provide a complete quote with Bernanke qualifying that statement by noting that the rise in inflation has been “milder this time” vis-à-vis previous inflationary episodes. But, the damage was done NZD fell back just below USD0.7800 in afternoon US trading, finishing the offshore session flat.

The Australian dollar continued it’s strength through the night, following yesterday’s better than expected Q1 GDP result. The AUD traded up through 0.9600 to highs near USD0.9630 before Bernanke’s comments and a mild rise aversion in equity markets sent the AUD back to USD0.9570 into the close.

USD/JPY was slightly lower in the early overnight session before regaining the 105 level.

EUR/USD was largely sidelined, with the market still digesting Tuesday night’s Bernanke speech and tonight’s ECB meeting. Despite markedly improved sentiment toward the USD in the wake of Bernanke’s supportive USD comments on Tuesday, and yet more hawkish inflation talk today, EUR never threatened USD1.5400, trading instead through USD1.5420-80 during the offshore session.

US ISM non-manufacturing slips to 51.7 in May. The services and manufacturing ISM slipped marginally in May but remained comfortably above the 50 neutral level for the second month running. New orders and activity both accelerated, but shorter delivery times and weaker jobs growth were offsets. This result continues the run of recent less weak survey data that suggests the economy is more stalled than slumping. Also, productivity growth was revised up from 2.2% to 2.6% annualized following the upward revision to Q1 GDP growth but unit labour costs were unrevised at 2.2%.

US ADP private payrolls estimate of a 40k jobs gain, taken at face value, suggests that the labour market strengthened somewhat last month. Note however that ADP, particularly in months where the gap since the previous payrolls survey is five weeks, such as May, typically out-performs payrolls. Hence this does not make for a strong case to abandon out forecast that Friday’s report will show that May payrolls declined 100k. Still on the labour market, corporate layoff announcements totalled 103.5k positions in May, with 45% of those being in the automotive and finance sectors. This was the highest number of layoff announcements since late 2005. Although not a good guide to monthly payrolls, it does add weight to the view that the jobs market is not yet improving.

Euroland retail sales were weak in April, falling 0.4%, consistent with the soft retail PMI and German data already available. This report suggests that the sluggish household spending confirmed in the Q1 GDP report extended into the early part of the current quarter. Also, both the services and the composite PMI were unrevised from the advance May reports, leaving in place a modest slowdown in the growth rate.

Depressing UK data. The services PMI slipped into contractionary territory, and included a steep decline in its employment component. High St prices accelerated sharply according to the BRC, driven by food price inflation which is now likely to be reflected in a sharply higher CPI for May (already well above target at 3.0% yr in April). Completing the trifecta, consumer confidence slipped to a fresh low for this recently established ( 4 years ago) series, backing the message from other pessimistic surveys. So, the economy continues to slide, but inflation is accelerating.

The RBNZ announcement will dominate NZD direction today. Our economists are expecting a more hawkish statement. We believe that the recent budget stimulus and higher inflation expectations data provide a major offset to ongoing global growth downgrades and a lower starting point for NZ GDP growth. The NZD should see a reasonable bounce.

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

Events Today
Country Release Last Forecast

NZ RBNZ OCR Review 8.25% 8.25%
Aus Apr Trade Balance, AUDbn –2.74 –1.2

US Initial Jobless Claims w/e 31/5 372k 375k
May Chain Store Sales %yr 3.6% 1.8%
Q1 Mortgage Delinquencies % 5.82% –
Fedspeak – –
Eur ECB Rate Decision 4.00% 4.00%
Ger Apr Factory Orders –0.6% 0.5%

UK BoE MPC Policy Decision 5.00% 5.00%
Apr Building Permits –4.5% 0.7%
May Ivey PMI nsa 57.6 57.0

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (3 June)
• 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)

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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