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Sunday June 8, 2008 - 21:04:09 GMT
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FX Research - Morning Repor

Morning Report Monday 9 June 2008

News and views
New Zealand dollar was well and truly sidelined during the Friday night session, despite plenty of action elsewhere. Amid a sharp 380pt fall in equities, an $11/bbl+ rise in crude oil prices to record highs and a 150pt+ surge in the euro the NZD traded a tight 0.7650/0.7699 range. US non farm payrolls provided some brief excitement for the NZD with a much larger than expected rise in the US unemployment rate - from 5.0% to 5.5% - sending NZD up from 0.7675 to just shy of 0.7700 cents. But, the rise proved short-lived. A sharp fall in US equities linked to the surge in oil prices weighed on the high yielders with NZD/EUR and NZD/JPY sales seeing NZD/USD cede its payrolls driven gains. NZD/USD finished the session largely unchanged. Crude oil posted a staggering $11+ rise to USD139.01 highs on Friday night. USD weakness got the ball rolling initially but Israeli Transport Min Mofaz provided the real spark for the oil frenzy with his bellicose comments that an Israeli attack on Iranian nuclear sites looked likely given the lack of success in halting Tehran’s uranium enrichment projects.

The Australian dollar saw a lot more action. After grinding higher in the London morning the AUD/USD spiked to a high of 0.9644 after the weaker than expected US employment report (at least in terms of the unemployment rate – see below). This is just below the post float high of 0.9654 recorded on May 21.

USD/JPY was range bound during the London morning before collapsing on the soft US data and rumours of an Israeli strike on Iran (which saw equities and risk appetite generally lower across asset classes). USD/JPY fell from just above 106 to below 105 overnight.

EUR/USD spiked 100pts on the much larger than expected 0.5% rise in the US unemployment rate to 5.5% and continued to grind higher through the remainder of the session, finishing at 1.5766. USD bears have decisively wrested control of EUR/USD with Bernanke’s hawkish inflation commentary and USD supportive comments earlier this week now a distant memory.

US payrolls down 49k; jobless rates jumps to 5.5%. The big surprise was the jump in the jobless rate from 5.0% to 5.5% in May, steeper than anything we saw in either the early 1990s recession or the 2001 recession. That was partly due to a 285k fall in the separate household jobs survey, but mainly due to an above trend jump in the size of the labour force. It rose by 577k, jobs fell by 285k, so unemployment jumped by a whopping 861k in the month. The BLS explained that the timing of the survey (later in May than typical) would have picked up more school-leavers looking for their first jobs than usual (who would normally be caught in the June survey). That explains why teenage unemployment jumped from 15.4% to 18.7% last month. To the extent that this adjustment issue corrects in June, the jobless rate might edge 0.2 ppts lower, all else being equal. That said, a 0.5 ppt jobless rate jump is unheard of in modern times, yet these sorts of statistical distortions pop up all the time, so a big chunk of the unemployment rate jump is most likely genuine. Indeed the 5.5% level of the jobless rate is broadly consistent with the recent message from continuing unemployment insurance claims, consumer confidence in the labour market and the sluggish pace of GDP growth since Q4 last year. In other words, today’s result corrects for recent downside surprises in the jobless rate. In other news, there was a 1.3% jump in wholesale inventories in April which offsets the negative implications of the flat factory stocks picture for Q2 GDP.

German industrial production down 0.8% in April. IP has now fallen for two months running, consistent with the past five monthly declines in factory orders, and another sign that the Euroland economy won’t be as solid in Q2 as it was in Q1 (when GDP grew 0.8%).

Canadian employment growth of 8k in May remains positive but the trend has clearly slowed. The rising jobless rate is consistent with the economy stalling in Q1 (when GDP growth was –0.3% annualised). The May detail included a steep 34k rise in factory jobs which looks erratic; if that corrects next month, that will probably mean falling total employment. Nothing to prevent a Bank of Canada rate cut next week.

The RBNZ’s dramatic shift to forecasting interest rate cuts later this year paves the way for further NZD weakness. Downside risks to the data remain and any positive surprises should be taken as opportunities to sell into strength (next week’s retail sales may well present this opportunity). As always we remain wary of the USD leg, hence our preferred way of being short is on a TWI basis. We have been short the NZ TWI for some time now and would note that the RBNZ indicated there is a risk “...that the exchange rate falls faster and further than we have assumed”.

Our target for the TWI remains 66.00. There are a number of important releases in NZ next week but retail sales on Friday looms as the most important, with a technical bounce expected after the timing of Easter pulled down sales in March. Still the trend in sales growth is expected to remain weak.

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

Events Today
Country Release Last Forecast

NZ Q1 Building Work Put in Place 3.9% –
Aus Queen’s Birthday Holiday

US Apr Pending Home Sales –1.0% –0.5%
Fedspeak: Bernanke, Geithner, Rosengren
Jpn May Bank Lending %yr 1.2% –
Apr Leading Index 18.2% –
May Economy Watchers Survey 35.5 –
Eur Jun Sentix Investor Confidence 3.5 3.0

UK May Producer Prices %yr 4.6% 4.7%
Can May Housing Starts 214k 218k

Latest Research Papers/Publications
• RBNZ MPS Review (5 June)
• 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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