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Wednesday July 2, 2008 - 20:32:30 GMT
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Foreign Exchange News - Morning Report

Morning Report   Thursday 3 July 2008

News and views
The overnight session started out with a slightly better USD bid tone. But this failed to follow through with softer US data (see below) suggesting downside risks to tonight’s US payrolls report, and Citibank suggesting a technical buy EUR for 1.69 trade. This saw the New Zealand dollar retrace from a London morning low of 0.7563 to a high of 0.7617 in the afternoon. In late NY, the NZD dipped back below 0.7600 as US equities turned a flat day into sizeable losses as oil prices punched through $144/bbl.

The Australian dollar was slightly better bid than the NZD due to the better than expected Australian retail trade data yesterday. AUD/USD traded higher through the session briefly touching 0.9650 and settling around 0.9625 in the NY afternoon.

USD/JPY was driven by the USD leg, up to a high of 106.77 before trading back below 106.00 later on as US equity sentiment deteriorated once more, helping the yen attract safe haven bids.

Once the London morning was over, EUR tracked higher for most of the session, reaching a high of 1.5889, the euro’s strongest level since 24 April. Anticipation of a hawkish ECB on Thursday, the poor ADP payrolls data and yet another record high on oil prices all helped EUR/USD.

US factory orders up 0.6% in May. Factory orders were once again stronger looking than the previously released durables component, due to the rising price of non-durable orders (up 1.2%), mostly energy. Excluding petroleum, non-durables were up just 0.1%. Revisions to the more important (from an economic activity perspective) May durables component were minimal.

US ADP private payrolls estimate of a 79k loss of jobs is the weakest for this series since late 2002. ADP has tended to out-perform (i.e. find more jobs than) the Bureau of Labor Statistics private payrolls estimate by up to 100k per month recently. So the issue is, will BLS payrolls be really weak in tonight’s June report (i.e. down 180k or so?), or is ADP simply catching up to prior weakness in the BLS data? Westpac’s forecast is for a 70k loss in total payrolls (i.e. including government jobs) in June.

Other US data. Corporate layoff announcements totalled 81.8k positions in June (the highest number in June for three years), with 20% of those being in the finance sector. Although not a good guide to monthly payrolls, the numbers confirm that jobs market weakness is likely to persist. Similarly, reported slippage from 166 to 163 in their June employment/hiring index.

Euroland PPI hits 7.1% yr in May. A new record high for producer price inflation will only firm the resolve of the hawks on the European Central Bank to push through a 25bp rate rise tomorrow.

UK construction PMI falls to 38.8 in June. The construction PMI plunged to a new all time low (the series began in 1997), adding to the string of weak news out of the housing sector. Hard to believe that less than one year ago, in August 2007, this index was at a cyclical high of 65.0. Not unrelated, the Bank of England reported that mortgage equity withdrawal in Q1 was down £8.5bn (equivalent to 2.4% of GDP) on Q1 last year. With house prices falling and refinancing costs rising, MEW is no longer viable for most. That, coupled with consumer confidence back at its 1980s low-point, slower jobs growth and rising unemployment will weigh on consumer spending in coming quarters, and poses some risk of a technical recession over the next year. Indeed Marks & Spencer, one of the premier UK retailers, reported same store sales in the June qtr down 5.3% yr. Their share price was marked down 20% as a consequence, dragging other retailers along for the ride. May’s surprisingly strong official UK retail sales report showing sales up 8.1% yr is looking increasingly unsustainable.

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, as reflected in global equity markets, remain the key driver of near term direction.

Events Today
Country Release Last Forecast

NZ Jun ANZ Commodity Prices 1.0% –
Aus May Trade Balance AUDbn –0.957 –1.4

US Initial Jobless Claims 384k 385k
Jun Non-Farm Payrolls ch’ –49k –70k
Jun Unemployment Rate % 5.5% 5.3%
Jun ISM Non-Manufacturing 51.7 49.5
Eur Jun PMI Services (F) 49.5 a 49.1
May Retail Sales –0.7% 1.0%
ECB Repo Rate Decision 4.0% 4.25%

UK Jun House Prices %yr –3.8% –5.9%
Q2 BoE Credit Conditions Survey – –
Jun PMI Services 49.8 50.0

Latest Research Papers/Publications
• More for less (2 July)
• 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)

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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