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Thursday July 3, 2008 - 23:42:18 GMT
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FX Blog - Morning Report

Morning Report  Friday 5 July 2007


News and views
FX markets traded with understandable caution overnight ahead of the ECB announcement and US jobs data. These produced sharp net gains for USD, mostly against EUR and CHF, as while the ECB hiked 25bp as expected to 4.25%, ECB president Trichet said he had “no bias” regarding any future interest rate moves. TheNew Zealand dollar had already tapered off from 0.7600 to 0.7585/90 ahead of this then extended losses to lows at 0.7552. It then bumped around these levels into the US close.

The Australian dollar followed a similar pattern but with an even more modest response to the ECB comments, dipping from 0.9620 to 0.9585 then quickly back to 0.9600.

The euro approached the double event risk just short of 1.5900 and tumbled to 1.5750 as Mr. Trichet sounded far less hawkish than expected. The US employment report wasn’t too impressive, with unemployment sticking at 5.5% but EUR/USD kept falling, to 1.5700. Amid the mayhem, USD/JPY bounced from 106.15 to the 106.80 area and held around there into the US long weekend.

US payrolls jobs down 62k in June, and downward revisions worth a further 52k meant that the Q2 monthly average fall in jobs was 64k, compared to just a 39k average loss in April-May prior to the revisions. Also, the separate household survey found a second consecutive monthly job loss of 155k, sufficient to hold the jobless rate at 5.5% despite the expected partial pull-back in teenage unemployment which explained some of May’s sharp spike from 5.0% to 5.5% (due to school-leavers hitting the data earlier than usual). We now have a genuine 5.5% unemployment rate, not a distorted one. Also initial jobless claims jumped 16k to 404k, pointing to further job market deterioration in July.

US non-manufacturing ISM falls to 48.2 in June, returning to a contractionary reading after rising back above 50 in April-May, consistent with the view that the economic outlook has softened a little recently. The composite headline was at its lowest since January’s all-time low (series started in 1997), and June’s reading was about in line with 2001 readings when the economy was last in recession. The June detail showed orders and jobs especially soft, the latter another sign that the jobs data are going to get worse before they get better. The case for the Fed to tighten monetary policy this year is rapidly disintegrating!

The European Central Bank lifted its repo rate by 25bp to 4.25%, acting upon its “heightened alertness” of the past month. However in the press conference, ECB chief Trichet declined to repeat that phrase, or “strong vigilance”, which indicates that there won’t be a follow-up hike in the near-term. Indeed he said “starting from here, I have no bias”, and implied that the hike was a signal to price and wage-setters to behave, not an attempt to slow the economy. On the data front, Euroland retail sales jumped 1.2% in May after three monthly declines.

Also the Swedish Riksbank lifted its rate 25bp to 4.5% and signalled likely further tightening later this year.

More bad news on the UK economy. The services sector slumped to its weakest growth pace since 2001, according to the PMI. Recall that the construction and factory PMIs were similarly depressed. At face value, the message is that the UK economy is stalling, if not entering recession. Adding to the economy’s woes, in its latest credit conditions survey, the BoE found that a net balance of 22% of lenders expected to tighten the availability of mortgage, unsecured and corporate credit in Q3.

We are wary of the potential for NZD/USD to push higher on the back of renewed USD weakness and/or better than expected NZ data. This may result in a short squeeze in the lead up to the CPI data released on 15 July. However, any significant bounces may just present a good opportunity to sell into ahead of the RBNZ July OCR review. We still don’t feel the FX market is pricing in enough risk of a potential RBNZ cut.

Upcoming Events
Date Country Release Last Forecast

4 Jul US Independence Day holiday
Jpn May Leading Composite Index 92.8% 93.0%
Ger May Factory Orders –1.8% –1.0%
Can Ivey PMI nsa 62.5 62.5
7 Jul Aus Jun ANZ Job Ads -1.7% –
US Fedspeak: Yellen
Eur Jul Sentix Investor Sentiment 5.2 2.5
Ger May Industrial Production –0.8% 0.4%

UK May Industrial Production 0.2% 0.2%
May Building Permits 14.5% –7.1%

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)
• NZ Q2 Consumer Confidence (25 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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