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Tuesday August 5, 2008 - 21:30:11 GMT
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FX Blog - Morning Report

Morning Report  Wednesday 6 August 2008

News and views
Supported by strong gains on the DJIA (+300pts in late NY trade) and lower oil prices, USD rallied firmly in London/NY before easing back slightly on the somewhat dovish FOMC statement (downside risks to growth no longer “diminished” and still only one dissenter (Fisher) despite inter-meeting hawkishness from Plosser and Stern). A stronger than expected July non-manufacturing ISM report also helped USD. The New Zealand dollar outperformed most majors, recovering from its London low of 0.7221 to ratchet back to 0.7260.

The Australian dollar extended its losses through London and NY trade in the wake of the RBA’s clear signal of monetary easing ahead, grinding from 0.9220 to as low as 0.9133 in NY, with the dovish Fed providing only about a 20 tick pop higher (to 0.9160).

USD/JPY was under pressure in the London morning but picked up briskly from the 107.70 area to above 108.20 as equities extended their gains.

EUR/USD traded modestly lower overall, slipping below 1.5500 in London and staying there, with only a fleeting 15 pip squeeze higher to 1.5470/75 on the FOMC statement.

US Fed left its funds target unchanged at 2.0%. Once again, Richard Fisher of the Dallas Fed dissented in favour of an immediate rate hike. The statement noted that “Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The “risks” comment from the June 25 FOMC statement read thus: “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.” So this time around the Fed has dropped the reference to diminished downside risks to growth, in line with recent Bernanke testimony, and described inflation risks as significant rather than increased. Overall, that could be interpreted as a Fed that is a little further away from an eventual policy retightening now compared to June, but by fiddling with the inflation adjective the Fed has been careful not to be to clear-cut in its assessment of how the balance of risks might have shifted over the last six weeks.

US ISM non-manufacturing rises from 48.2 to 49.5 in July. The nonmanufacturing ISM revealed a smaller contraction in July activity, despite slightly weaker readings for activity and orders. These were offset by longer supplier delivery times and less weak jobs, the other two components of the composite index. The prices index was a little lower, perhaps reflecting the recent pull-back in energy prices. When combined with the previously released manufacturing survey, the “whole economy” ISM was just south of neutral, consistent with the view that the US economy is stalled rather than slumping.

Euroland retail sales fell 0.6% in June, down for the fourth month in five, fully reversing their May gain and leaving in place a steep downtrend that means annual sales volume growth has slumped to –3.1% yr, the weakest since combined European data became available in the mid 1990s. This result suggests that household spending contracted in Q2, and increases the risk that Euroland GDP growth failed to grow at all in the second quarter (date due 14/8). Also the July services PMI was unrevised at 48.3.

The UK services sector continued to contract in July, despite a slight 0.3pt improvement in the headline services PMI to 47.4. The employment index showed renewed weakness which we expect to soon show up in the official labour force data. And new business fell to its lowest yet. Also, the industrial report for June revealed more bad news on activity, with manufacturing output dropping 0.5% again.

We continue to like NZD lower multi week especially on a TWI basis. Our view is supported by RBNZ governor Bollard’s reiteration this week that there is scope for further easing and NZ Treasury’s apparent expectation of negative Q2 GDP.

Westpac Strategy, 0800 922 239
With contributions from Westpac Economics

Upcoming Events
Date Country Release Last Forecast

6 Aug Aus Jun Housing Finance –7.9% –2.5%
Jpn Jun Leading Index 92.9% 91.1%
Ger Jun Factory Orders –0.9% –1.0%

UK Jul BRC Shop Price Index %yr 2.5% –
Jul Consumer Confidence 61 57
Can Jul Ivey PMI nsa 69.6 60.0
7 Aug NZ Q2 HLFS Employment –1.3% 0.2%
Q2 HLFS Unemployment Rate 3.6% 3.8%
Aus Jul Employment chg 29.8k 10k
Jul Unemployment Rate 4.2% 4.2%

Latest Research Papers/Publications
• NZ Q2 Wage Review (4 August)
• NZ Weekly Forex Outlook (4 August)
• The coming employment downturn (30 July)
• NZ Weekly Forex Outlook (28 July)
• RBNZ OCR Review (24 July)
• NZ Weekly Forex Outlook (14 July)
• RBNZ OCR Preview (18 July)

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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