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Tuesday June 17, 2008 - 21:10:12 GMT
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FX Research - Morning Report

Morning Report  Wednesday 18 June 2008

News and views
For the first session in several USD direction didn’t dominate trading overnight. The June German ZEW survey was weaker than consensus but US May housing starts and industrial production both came in weaker than expectations too, leaving the majors trading within well-defined ranges. That said, the USD ultimately lost a little bit of ground as the offshore session drew to a close. A flurry of options related selling around the NY 10am expiry saw the

New Zealand dollar dip from 0.7545 to session lows near 0.7513 but once that passed the NZD grinded higher for the remainder of the offshore session to 0.7550/60. The NZD opens to local session at 0.7545.

 The Australian dollar was also rangebound within 0.9390/0.9433. Like the NZD, AUD was hit by a mild bout of options related selling into the NY 10am cut, sending it to session lows near 0.9390 but the remainder of the session saw the unit grind to 0.9440/50 into the close.

USD/JPY traded heavy early hitting a low of 107.61 before retracing to a high of 108.39. The pair finished the session at 108.00, mostly ignoring the heightened risk aversion signal from equity markets overnight.

A softer German ZEW survey in European trading saw EUR give up most of its Asian session gains in early offshore trading. From highs near 1.5550 EUR slipped to lows near 1.5460. But, EUR reclaimed lost ground following softer than expected US housing starts and industrial production. The ECB’s Mersch also gave EUR a mild lift when said that “heightened alertness is the same as vigilance”, cementing the case for a July ECB hike. That saw EUR grind up through the remainder of the offshore session to 1.5510/20 into the NY close.

The Dow Jones sank 110pts overnight even though crude oil fell just shy of USD1/bbl and investment bank Goldman Sachs comfortably beat expectations for Q2 earnings. Investor concerns focussed on US regional banks following reports of rising problem loans/losses tied to poor residential and commercial property markets. US bond yields appear to have topped out for now. US 2 year bond yields fell 14bp, aided by softer US data but most the gains came earlier in the Asian session when a flurry of well connected Fed reporters damped recent speculation that the Fed could tighten policy in the next couple months.

US PPI up 1.4% May, core rate up 0.2%. The PPI jumped sharply last month, lifting annual factory gate price inflation from 6.5% yr to 7.2% yr. The main drivers in May were a 9.3% surge in gasoline prices, a 3.8% jump in residential gas, and a 2.2% rise in tobacco prices. Food prices rose 0.8% in May. There was offset from falling clothing, autos and light truck prices, which helped constrain the core rate to 0.2%, and 3.0% yr.

US housing starts fell 33% to a new 17 year low in May, although the trend pace of decline since the end of 2007 has slowed sharply. Over those five months, starts fell just 2.5%, compared to a 27% fall in the previous 5 months. That suggests that starts might be finding a base, a view supported by the fact that permits held above their March low point in both April and May.

US industrial production fell 0.2% in May, its second consecutive decline, and the level of output in May was down 0.1% yr on May last year. That could be described as a mild industrial recession. A fall in utility output due to cooler weather weighed on the result, but excluding that sector (and a 0.1% rise in mining), manufacturing output was unchanged in May. Indeed manufacturing has only posted one monthly gain in the past six months (0.2% in March), otherwise in Dec-May factory output either stalled or fell.

US current account deficit widened by $9.1bn to $176.4bn in Q1, mainly due to a $1bn wider trade deficit and a $6bn fall in the income surplus. Despite the deteriorating position in the quarter, the deficit remains below the $211bn record high set in Q3 2006.

German ZEW analysts’ survey slumps 11 pts to –52.4 in June. The ECB’s warnings of an imminent rate hike, oil price gains, rising inflation and renewed stock market losses are all factors at play.

UK CPI jumped 0.3 ppts to 3.3% yr. The main drivers were food & drink and energy. For only the second time since the Bank of England was granted policy independence in 1997, inflation has exceeded the 3% upper limit beyond which the BoE Governor must write an open letter to the Chancellor explaining why, and what was being done about it. In that letter the Governor wrote that inflation was likely to rise sharply in the second half of this year, to above 4%, but that “there are good reasons to expect the period of above-target inflation... to be temporary... there is not a generalised rise in prices and wages” (as evidenced by the still subdued core inflation rate of 1.5% yr in May).

With no significant local data due for more than a week the NZD is likely to be at the mercy of near term USD sentiment. Beyond that, expectations for a negative print on Q1 NZ GDP next week should reinforce the RBNZ’s easing bias and keep the NZD capped below 0.7600.

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

Upcoming Events
Date Country Release Last Forecast

18 Jun Aus Apr Leading Index ann’lsd 3.3% –
May Merchandise Imports AUDbn 17.5 –
US Fedspeak
Jpn Bank of
Japan Minutes (Apr 30) – –
UK Jun BoE MPC Minutes 8–1 8–1
Jun CBI Industrial Trends Survey –10 –
Can May Leading Index 0.1% 0.1%
19 Jun NZ May Electronic Card Transactions 1.4% –
Aus Q2 Survey of Industrial Trends 56.0 –

US Initial Jobless Claims w/e 14/6 384k 375k
May Leading Index 0.1% 0.1%

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)
• RBNZ MPS Review (5 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 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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Mon 10 Sep 2018
AA 08:30 GB- GDP, Trade, Output
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