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Thursday June 26, 2008 - 21:21:26 GMT
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Forex Blog - Morning Report

Morning Report   Friday 27 June 2008

News and views
The US dollar
was softer through the overnight session. After a short rally early in the London day, traders revisited the message from the FOMC and continued the USD selling they had started in Asia. From then it was a list of USD negatives, starting with a rumour that Chrysler had filed for Chapter 11 bankruptcy, gold surging from around $885 to $910 and a fresh high in oil prices after Libya said that it was considering cutting output. More mixed US data, a strong contrast with the run of stronger than expected figures through May, continued to weigh on the currency as well.

The weaker USD saw the New Zealand dollar higher for most of the day, though it tended to lag the other majors, and the sharp drop in US equity markets later in the day saw it give back most of its gains. The NZD only lost a little ground against the USD after yesterday’s current account figures, but this was enough to take the NZD/AUD cross rate to its lowest levels in seven years. Overnight the  Australian dollar traded largely alongside the NZD, up during the London morning before giving it back on softer equities later on.

Soft equity markets reined in investors’ appetite for risk, leaving the traditional ‘carry trade’ funding currencies, the yen and Swiss franc, higher on the day. The euro also made solid gains, breaking through stop-loss levels around 1.57 to head toward 1.5750. The pound rose in anticipation of the testimony of several Bank of England policy committee members, though the overall tone of their statements suggested that market pricing for rate hikes is overdone.

US Q1 GDP growth revised up from 0.9% to 1.0% ann’lsd. Although just a small revision, in qualitative terms it was significant, because business investment’s small decline was revised to a small rise, and that in turn was enough to push domestic final sales slightly positive. So while US domestic economic growth has essentially stalled, it is no longer true to say that it is in mild recession. Note also the upward revision to the core PCE deflator, although it remains softer than in late 2007.

US initial jobless claims held above 380k for the third week running (at 384k), its highest 3 week string of readings since 2003. Also, continuing claims see sawed back up to a fresh four and a half year high in the non-farm payrolls survey week. Both outcomes point to further gradual deterioration in the labour market, which, within the next few months, should translate into a slightly faster trend pace of payrolls decline, and a higher jobless rate.

US existing home sales rose 2% last month, but the pace of sales remained within the recent range of 4.89-5.02mn annualised. This result confirms that existing home sales have bottomed out over the past six months or so, at a pace more than 30% below their peak in 2005. But with the inventory of unsold homes equivalent to almost a year’s worth of sales (twice the norm of 5-6 months), downward pressure on prices will persist.

Euroland money supply growth at 10.5% yr in May remains uncomfortably rapid for the ECB, although some of the lending components have slowed, including lending to the private sector which eased from 10.6% yr to 10.4% yr in May. But still not conclusive evidence that the credit crunch is severely impacting financial conditions. Also, the annual German inflation rate looks to have accelerated about 0.2-0.3 ppts in June, based on state data from Saxony, Hesse and North-Rhine-Westphalia. If confirmed in the national data tonight, that would point to the German CPI rising from 3.0% yr to 3.3% yr, and Euroland inflation rising from 3.7% yr towards 4%!

UK business investment growth was revised from –1.4% to –1.8% in Q1. That is unlikely to be significant enough to see a downward revision to Q1 GDP’s 0.4% growth rate. Also, BoE Governor Mervyn King presented regular testimony today. He gave a clear description of the current and likely future inflation picture, acknowledging that it would be above target for up to a year, but also indicating that the Bank would “not overreact”.

We continue to look for opportunities to sell into NZD/USD. Today’s GDP report should be the first leg of confirmation that the NZ economy is in recession – we expect a 0.3% drop, in line with the market average and the RBNZ. This should see the currency continue to underperform in ensuing days. The May trade balance is also released at the same time, and while we favour a strong number, it’s likely to be lost in the mix.

Upcoming Events
Date Country Release Last Forecast

27 Jun NZ Q1 GDP %qtr 1.0% –0.3%
May Merchandise Trade NZDmn –334 450
Aus RBA Assistant Governor Debelle Speech

US May Core PCE Deflator 0.1% 0.2%
May Personal Income 0.2% 0.3%
May Personal Spending 0.2% 0.8%
Jun UoM Consumer Sent (F) 56.7a 57.0
Jpn May Unemployment Rate 4.0% 4.0%
May Nationwide CPI %yr 0.8% 1.3%
Tokyo CPI %yr 0.9% 1.2%
May Industrial Production –0.2% 2.3%
May Retail Sales %yr 0.1% –0.1%
Eur Jun Retail PMI 53.1 –
Apr Current Account €bn –15.3 –

UK Q1 GDP (F) 0.4% a 0.4%
Q1 Current Account £bn –8.5 –12.1
Can May Industrial Product Prices 1.4% 1.2%
30 Jun NZ
May Building Consents s.a. 82% -44.5%
Aus May Private Sector Credit 0.4% –
Jun TD-MI Inflation Gauge 0.3% –

US Jun Chicago PMI 49.1 48.0


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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