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Monday June 16, 2008 - 21:41:56 GMT
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FX Research - Morning Report

Morning Report   Tuesday 17 June 2008


News and views

The USD was softer across the board during the offshore session, driven by a confluence of factors. First we had the inevitable knee-jerk reaction to the G8 statement. While it is common practice to exclude foreign exchange from the communique when Central Bankers are absent, authorities could have chosen to send a strong signal yet they chose not to. Then came concerns ahead of US broker reports due this week (Lehmans Monday, Goldman Sachs Tuesday, Merrills Wednesday) and later in the session we had softer data (see below) and then higher oil prices, with WTI posting a new high and closing in on $140/ bbl. To top it off a Washington Post article cited unnamed sources at the Fed that Chairman Bernanke has no plans to lift interest rates.


All of this was enough to see the New Zealand dollar grind higher through the session from an early low of 0.7486 to a high of 0.7544. The NZD opens the day at 0.7527.


The Australian dollar built on Friday’s gains aided by a broad weakening in the USD, grinding up from a low of 0.9370 to a high of 0.9425. That said, the AUD’s gains overnight look mild in comparison with firmer metals prices, lower US bond yields and a firmer EUR.


USD/JPY was slightly more mixed, breaching 108.50 early before retracing later on to finish the session largely square. A break above 108.75 would take the pair to its highest level since early January.


EUR/USD was well bid, climbing 170pts from a low of 1.5345 to a high of 1.5519. EUR’s session highs coincided with crude oil trading up $6/bbl intraday to highs of $139.89/bbl. EUR was also given a boost by upward revisions to May Euroland CPI to 3.7% y/y, sending the 2yr European bond yield up 8bp on the day. Against that a Washington Post article cited unnamed sources that Fed Chairman Bernanke is much more concerned about growth than inflation and has no plans to raise interest rates. That and a softer NY Empire survey saw US 2 yr yields fall 3bp on the day. Crude oil posted a sharp reversal in afternoon US trading finishing the day down US88c at $133.98/bbl, but with yield spreads having moved convincingly in the EUR’s favour on the day the pair held onto most of its gains to finish the session at 1.5480. The Fed’s Lacker (non voter) said that the balance of risks have shifted from a severe downturn to inflation so the Fed needs to adjust rates accordingly, typical hawkish commentary from Lacker and left no impression on markets.


US NY Fed index weakened to -8.7 in June from -3.2 in May, reaching a three month low. The result was weaker than the market expected (-0.2), and overall continues to portray an environment of weak activity but continuing price pressure. All activity indices but employment recorded falls, with new orders in particular falling from -0.5 to -5.5%. Meanwhile, the prices paid index remained elevated, falling only slightly from last month’s record high. However, the prices received index rose markedly from 15.2 to 26.7, and is now approaching a record level.


The US NAHB housing market activity index fell from 19 in May to 18 in June, slightly below expectations. The fall brings the index back to the record low reached in December last year and to levels not seen before that since 1985. Projections for sales in six months time were unchanged at 28. Overall, homebuilders continue to see the housing market at the bottom, although their continued pessimism suggests there may be more weakness to come.


US Fed chairman Bernanke spoke on “Challenges for healthcare reform”. There was no discussion on current economic issues.


Euroland inflation revised up from 3.6% to 3.7% yr, the highest since the euro was introduced in 1999. Core inflation edged up from 1.6% to 1.7% yr. But the high headline rate can only add to the case for the European Central Bank to tighten rates on July 3.


Canadian auto sales fell 2.6% in April after a downwardly revised -1.6% in March.



With the RBNZ all but committing itself to rate cuts later this year, the interest rate profile in New Zealand sticks out like a sore thumb. Soft economic data over coming months would certainly justify what the market is pricing, but the flipside is that the inflation outlook is deteriorating here as much as it is elsewhere – early estimates have the annual rate creeping towards 5% by Q3 – and a weaker currency will only make this worse. Little data to drive the NZD this week; next week brings Q1 GDP, though a negative print is already widely expected.


Michael Gordon, Market Strategist, Wellington, Ph: (04) 470 8266

With contributions from Westpac Economics and Westpac Strategy


Events Today

Country Release Last Forecast

Aus RBA Minutes of May Meeting

Q1 Dwelling Commencements 2.6% 0.5%

US Q1 Current Account Balance $bn –172.9 –170.0

May PPI/Core 0.2%/0.4% 0.8%/flat

May Housing Starts 8.2% –4.0%

May Housing Permits 5.4% –2.5%

May Industrial Production –0.7% 0.2%

Jpn Apr Tertiary Activity Index 0.3% 0.6%

Eur Apr Trade Balance €bn –2.4 –1.5

Jun ZEW Analysts’ Survey –43.6 –40.0

Ger Jun ZEW Analysts’ Survey –41.4 –38.5

UK May CPI %yr 3.0% 3.3%


Latest Research Papers/Publications

• NZ Weekly Forex Outlook (16 June)

• Always look on the bright side (12 June)

• NZ Q1 Terms of Trade (11 June)

• NZ Agribiz June 2008 (9 June)

• NZ Weekly Forex Outlook (9 June)

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 17 June 2008. 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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