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Wednesday September 17, 2008 - 20:19:24 GMT
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Forex Research - Morning Report

Morning Report Thursday 18 September 2008


News and views

USD Index ground higher until about NY lunchtime then sank >1% in afternoon trade. Heavy losses in financial stocks – a disappointment given the Fed’s action on AIG – took their toll as the DJIA sank 400pts in late NY. Poor US Aug housing data didn’t help as markets priced in more Fed easing. Flight to safety was starkly evident in the 2 year Treasury note’s massive rally from over 1.90% to almost 2.60% – though this only took it back to Tuesday’s intra-day levels! Price action on gold was remarkable – spot traded quietly in the low $780s per ounce through turbulent London markets and in early NY then about the time the stock market opened, it leapt to $800/oz then surged to above $860/ oz by late NY, up >10% in total. NZD/USD took its cue from broad USD sentiment, easing from 0.6620/40 to under 0.6530 then squeezing back to 0.6640.


Risk aversion drove AUD/USD down from near 0.8000 to a low around 0.7805 but amid the big dollar slide, the Aussie rebounded to 0.7950.


EUR/USD drifted from 1.4200/50 in London to about 1.4100 as trade switched fully to NY, where upon the pair rallied furiously to above 1.4300.


A little surprisingly, USD/JPY didn’t make a serious run at Tuesday’s lows in the mid-103s but it did lose about 70-80 pips overall to the 105 area.


Another night of market turmoil. Yesterday’s Fed bailout of AIG seems to have provided just a temporary boost to stock markets, which slumped again overnight as interbank lending rates soared. Fear of counterparty default is once again freezing up markets, and commentators (and market pricing) are questioning just how long some of the remaining Very Big Names in US banking will continue to exist in their own right. Investors seeking respite from it all have bought silver and gold overnight, the latter’s price soaring the most in almost a decade.


US housing starts and permits continued to be weighed down by unwind of the June spike in multiples activity in NY to beat the July 1 building code change. Abstracting from that distortion, the figures still show underlying weakness, with single family starts down nearly 2% and permits off 5% – both to new cycle lows.


US current account deficit widened to $183.5bn in Q2 from $175.5bn in Q1, reflecting a wider trade deficit largely due to the higher oil price. The deficit should narrow in the second half of this year as the lower oil price comes through.


Bank of Japan on hold at 0.50%. The key sentiment from the Statement is “Although the economy is under no pressure to adjust production capacity and labor, these downside risks to the economy demand attention.” In other words, the Bank is relaxed about the possibility that domestic factors will exacerbate the negative cyclical momentum coming from the terms of trade and external demand. Governor Shirakawa is also at pains to continue warning that an extended period of loose monetary may eventually manifest itself in an inflationary impulse. The target rate looks set to remain at 0.50% for a considerable period.


The UK jobs market continues to soften. Unemployment posted a 33k rise in Aug, its steepest gain since 1992; and employment contracted 16k in the three months to July, its first fall for this cycle. Separately, the CBI industrial survey showed plunging orders, falling output and even weaker prices, adding to the body of evidence pointing to a recessed factory sector creating diminishing inflationary pressure.


The Bank of England’s minutes to the September policy meeting showed an 8:1 vote, with the dissenter voting for an immediate 50bp rate cut (last month he voted for –25bp) and last month’s single vote for a 25bp rate hike dropped. This effectively means that the policy committee now has a mild easing bias. Separately, it was confirmed that retail bank HBoS is in advanced talks with Lloyds TSB regarding a potential acquisition of the former by the latter. Also, the Bank of England has announced it will extend its Special Liquidity Scheme (which provides liquid Treasury bills to banks in exchange for mortgage backed assets) until 30/1/09; the scheme had been due to close next month. This is in response to the latest collapse in confidence in financial markets.



The RBNZ’s choice of -50bp over -25bp last week will most likely be repeated in Oct and reinforces our preference for long AUD/NZD. NZD/USD however remains prone to US-driven volatility.


Westpac Strategy, 0800 922 239

With contributions from Westpac Economics


Events Today

Country Release Last Forecast

Aus Q3 WBC-ACCI Survey of Indust Trends 53.9 –

Sep RBA Bulletin

US Initial Jobless Claims w/e 13/9 445k 450k

Sep Philadelphia Fed Index –12.7 –5.0

Aug Leading Index –0.7% –0.4%

Jpn Jul Tertiary Activity Index –0.8% 0.4%

UK Aug Retail Sales 0.8% –1.0%

Aug Public Sector Net Borrowing £bn –4.8 9.0

Aug M4 Money Supply %yr 11.2% 10.5%

Can Aug Leading Index flat flat

Jul Wholesale Sales 2.0% –


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)

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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