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Tuesday September 16, 2008 - 21:20:11 GMT
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Forex Research - Morning Report

Morning Report  Wednesday 17 September 2008


News and views

FX markets traded very nervously in illiquid conditions, paying little heed to fundamental economic news ahead of the FOMC decision. Various central banks injected funds to ease money market strains. The DJIA had opened down about 170pts but with the help of rumours that the US government would help AIG, the index ground back to a small gain by the time of the Fed statement. Its steady hand at 2% initially saw the Dow drop 150pts but it soon rebounded to register a 140pt gain in late trade. A mixed session for USD ultimately saw it higher once equities had bounced. Most financials participated in the rally, though Goldman Sachs was near flat despite its Q3 profit beating consensus for the 13th consecutive quarter.


NZD/USD had a good London-NY session, marching from near 0.6500 to 0.6590/00 with only a passing tremor on the Fed news.


AUD/USD saw its 0.7852 low in edgy London trade but by late NY had driven back to 0.7975, trading wide ranges in the NY afternoon thanks to FOMC/equities. Commodities were generally weaker.


EUR/USD oscillated in the low 1.4200s until the NY afternoon when as the DJIA ground higher, it slipped below 1.4100, before steadying in the mid-1.4100s. There are of course concerns over European financials too, with SNB’s Hildebrand saying the CB is in contact with big Swiss banks as UBS shares sank a record 17% (after -15% Mon).


USD/JPY started to find support in NY just above 103.50 and by late NY, with equities firmly in positive territory, it had rebounded sharply, to 105.60.


US Fed left its funds target unchanged at 2.00% following the FOMC meeting. There were no dissenters for a hike, in contrast to recent meetings. Key changes in the statement compared to Aug 5 were: financial markets strains had “increased considerably”; the reference to “elevated energy prices” from last month was dropped; slower export growth was raised as a possibility for the first time this month; and reference to elevated inflation expectations was dropped. Looking through that list, it is fair to say that this is a more sombre, less inflationary statement, though it does not hint that a rate cut is imminent. Although worded differently to last time, the risk assessment re growth and inflation remained balanced.


US CPI falls 0.1% in Aug. The CPI posted its first monthly decline in nearly two years in Aug, pulling the annual rate down from 5.6% to 5.4%. We expect US inflation to tumble sharply further in coming months, as recent collapsing energy and food prices, combined with favourable base effects and generally subdued economic activity, pull the headline CPI below 4% by year end and yet lower in 2009. Aug’s decline was due to a 4.2% fall in gasoline, and a generally softer 0.2% core rate after two 0.3+% outcomes.


Other US data. The NAHB activity index lifted off its July-August all-time low in September, rising to 18. July TIC data showed a significant capital outflow, mostly due to selling of agency paper (not surprising given Fannie Mae/Freddie Mac uncertainties).


Euroland inflation was confirmed at 3.8% yr in Aug; the core rate rose to 1.9% yr, but remains within the 1.6-2.0% range seen since the start of 2007. Also, a further rise in ZEW analyst sentiment from -56 to -41 in Sep would have reflected the weaker euro and lower oil price. But we suspect if the survey had been taken this week, the result would have been much weaker, given the Lehman Bros failure and stock market impact thereof.


UK CPI jumped another 0.3 ppts to 4.7% yr in Aug, its highest in the 11 years that the current measure has been calculated. Food and energy were the main drivers although the core rate edged up to 2%, matching the previous high of 2% reached briefly last year. The Bank of England Governor published another open letter today, explaining that inflation may yet hit 5% but also expressing the view that it should “fall sharply in 2009 and back to target thereafter” as lower commodity prices and weaker activity feeds through. We don’t see today’s outcome as preventing a BoE rate cut before year end, maybe as soon as October.



The RBNZ’s choice of -50bp over -25bp last week reinforces our preference for long AUD/ NZD but NZD/USD looks more mixed near term, prone to US-driven volatility.


Westpac Strategy, 0800 922 239

With contributions from Westpac Economics


Events Today

Country Release Last Forecast

Aus RBA Governor Speaks

Jul Westpac-MI Leading Index 2.0% –

Aug Merchandise Imports AUDbn 19.7 –

US Q2 Current Account $bn –176.4 –175.0

Aug Housing Starts –11.0% –3.5%

Aug Housing Permits –17.7% –5.0%

Jpn Bank of Japan Meeting 0.50% 0.50%

Eur Jul Trade Balance €bn s.a. –3.0 –3.5

UK Sep BoE MPC Minutes

Aug Unemployment ch’ 20.1 20.0


Latest Research Papers/Publications

• NZ Weekly Forex Outlook (15 September)

• Q2 Current Account Preview (12 September)

• RBNZ MPS Review (11 September)

• NZ Q2 Terms of Trade (10 September)

• NZ Agribiz September 2008 (8 September)

• NZ Weekly Forex Outlook (8 September)

• RBNZ MPS Preview (5 September)

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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