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Tuesday July 1, 2008 - 20:31:56 GMT
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Foreign Exchange Research - Morning Report

Morning Report  Wednesday 2 July 2008


News and views
The overnight session started out with Dow futures down sharply (around 100pts) and further rumours of impending Israeli air strikes on Iran. This saw the USD soft early and commodity prices bid. However, later in the session, equity markets pushed back to flat for the day after the cash market opened, assisted by a stronger manufacturing ISM release in the US. As a result the USD broadly took back the London morning losses. This all saw the New Zealand dollar range-bound during the London morning before heading lower in the afternoon, with the pair then spending most of its time trading between 0.7550 and 0.7575.

The Australian dollar traded alongside the NZD. The Aussie was also range bound in the London morning before retracing below 0.9550 later on and dipping below 0.9520 in the wake of the US manufacturing ISM’s >50 print.

USD/JPY was whippy. The London morning saw the pair trade down to a low of 105.23 on soft equity futures, before it regained ground in the afternoon to re take 106.00 as the DJIA returned to positive territory.

EUR/USD was range-bound for most of the session, trading higher with higher commodity prices in the London morning but retracing later and ending only slightly firmer, around 1.5785. Late in NY trade, USD softened slightly as carmakers reported June auto sales which in aggregate point to a poor month.

US ISM factory survey edges up to 50.2 in June. The May manufacturing ISM rose back to just above neutral in June, in contrast to the weaker regional Fed factory surveys but about in line with yesterday’s slightly higher Chicago PMI reading. In fact both the ISM and Chicago recorded their least weak reading since January in June, though that still paints a picture of a stalled factory sector. The ISM detail showed production growth, perhaps related to the end of the auto sector strike in late May, but slightly weaker orders and renewed slippage in the jobs index to a five year low. Meanwhile, the prices index rose to its highest since the oil price shock in 1973-1974! In other news, construction spending showed renewed weakness in May, down 0.4%, although prior data were revised somewhat higher. The residential side of things remains as weak as ever but commercial spending continued to grow, albeit at a slower pace, perhaps a sign that lending to business for construction purposes is becoming constrained.

Bank of Japan Tankan survey better than expected, but still consistent with softer activity. Q2 Tankan survey large manufacturers business conditions came in at +5 (expected 3, Westpac 4, previous 11) and large non-manufacturers conditions registered at +10 (expected 8, Westpac 7, previous 12). The “all industries, all firms” reading of -7 (from -4) is consistent with a very meek outcome for Q2 GDP.

Japanese earning growth softened in May. Total cash earnings rose 0.2%yr in May, down from 0.8% in April and an average of 1.5% in Q1. Scheduled earnings (total ex overtime and bonus) rose 0.3%yr, the seventh consecutive gain dating back to November last year.

The Euroland factory PMI was revised up slightly from 49.1 to 49.2 in June. That is still a new cyclical low for the series, indicative of slight contraction in the sector. Other data included a steady European unemployment rate at 7.2% in May, but a renewed fall of 38k in German unemployment in June. German retail sales also bounced back 1.3% in May, consistent with the sharply stronger retail PMI in that month. But that same PMI has since slumped sharply again in June. Overall, a mixed bag of data, that won’t stand in the way of a rate rise from the European Central Bank on Thursday. However if the weak survey evidence for June continues through Q3, a further rate rise might be harder to justify.

UK factory PMI slumped to 45.8 in June, its lowest since 2001, yet another sign that housing and financial services weakness is spreading to other parts of the economy. Also, house prices continued to slide last month, at a slower monthly pace but a steeper annual pace (–6.3% yr).

We continue to like NZD/USD lower multi week, as the market moves to price in more chance of a July rate cut from the RBNZ. However, for now, USD direction and risk appetite, nas reflected in global equity markets, remain the key driver of near term direction.

Upcoming Events
Date Country Release Last Forecast

2 Jul Aus May Retail Sales –0.2% 0.1%
May Dwelling Approvals 7.8% –5.0%

US Jun Corp Layoff Announcements – –
Jun ADP Private Payrolls ch’ 40k 20k
May Factory Orders 1.1% –0.5%
Eur May PPI %yr 6.1% 6.7%
UK Q1 Mortgage Equity Withdrawal £bn 7.3 5.3
Jun PMI Construction 43.9 43.1
3 Jul NZ Jun ANZ Commodity Prices 1.0% –
Aus May Trade Balance AUDbn –0.957 –1.4


Latest Research Papers/Publications

• NZ Q2 Employment Confidence Index (1 July)

• NZ Weekly Forex Outlook (30 June)

• NZ Q1 GDP Review (27 June)

• NZ Q1 Current Account Review (26 June)

• NZ Q2 Consumer Confidence (25 June)

• NZ Weekly Forex Outlook (23 June)

• NZ Q1 GDP Preview (19 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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