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Monday September 29, 2008 - 20:30:40 GMT
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Forex Research - Morning Report

Morning Report Tuesday 30 September 2008


News and views

Events conspired to create one of the tumultuous days in financial markets for a long time. European markets opened weak as UK bank Bradford & Bingley was nationalised and Fortis received a bailout from the Benelux governments. The banking consolidation continued in the US, with Citigroup acquiring the banking operations of Wachovia, the fourth largest US bank. The Federal Reserve increased its FX swap lines with other central banks from $290bn to $620bn and offered additional cash through its auction facilities, in an attempt to ease the pressures in short-term money markets, which have been exacerbated by firms hoarding cash over the quarter-end.


Then came the bombshell that the US House of Representatives had voted 228-205 against the proposed $700bn rescue plan. Risky assets plunged as investors fled to safety – the Dow Jones index was down as much as 6.5% from the open, the biggest one-day fall since the market reopened after 9/11. Treasury bond yields also fell sharply, and money markets have priced in near-term rate cuts by most of the major central banks. Gold rose by $40/oz on safe-haven demand, while oil fell around $10/barrel on expectations of weaker demand.


The peripheral currencies were hit hard, in favour of the relative safe havens of the yen and the Swiss franc. The NZD is currently down 1.9% to 0.6720, while the AUD fell more than 3% to 0.8010. The pound also fell 1.6% on concerns about the UK banking sector, while the euro fared relatively well, down just 0.4%.


US core PCE deflator 0.244% in Aug. The core PCE deflator just missed its third consecutive 0.3% gain by a whisker. Even so, the annual core PCE rose to 2.6% yr, its highest since the early 1990s – something that will keep alive inflation concerns in some quarters at the Fed. The report also showed that the end of the tax rebates continued to weigh heavily on disposable income in August, down 0.9%, although pre-tax income grew strongly, boosted by both wages and salaries and interest income. However spending was weak – in real terms it has not posted growth since May. That suggests that Q3 consumer spending will post a decline, which would be the first quarterly contraction in consumption since late 1991. That could be enough to push overall GDP growth negative. A further clue will come on Wednesday when September auto sales figures are published.


Japanese August retail trade balance decelerated to 0.7%yr. That compares to a 2.0% pace in July and the consensus forecast of 0.2%yr. These numbers were better than anticipated, with sales rising in the month against expectations of a small decline. However, the underlying story of declining real wages being echoed by falling retail volumes remains in place. Incomes are lagging consumer price inflation by some margin, and while this remains the case, consumption outcomes will remain weak.


Euroland business surveys all weak in Sep. This month’s collection of business/retail and consumer surveys conducted by/for the European Commission and the private sector revealed a further steep plunge in business confidence but unchanged (at depressed levels) consumer confidence. These outcomes point to slowing economic activity later this year, adding weight to the view that the European Central Bank will not see a late 2008 recovery in activity, paving the way for a rate cut in early 2009.


The UK mortgage market continued to shrink in August. The number of loans approved fell to a new record low (since current records began) and the net increase in mortgage outstandings was the lowest ever – just £143mn! That compares to over £10

billion at the peak in 2006 and 2007. This a net figure, so repayments, bad loan writeoffs and failure to drawdown all offset new lending approvals, although the Bank of England did not offer a more specific explanation as to why net mortgage lending collapsed so sharply last month – a 98.4% yr slump compared to “just” a 70.3% yr drop for the number of new loan approvals. In contrast, consumer credit held up but we suspect that is “last resort” borrowing as credit cards tend to get bashed when other forms of credit that need approval are drying up. Indeed, with another UK bank effectively nationalised at the weekend (Bradford & Bingley) the confidence hit to the UK business and household sectors is likely to be significant, adding yet further strength to the case for a BoE rate cut next week.


Outlook NZ’s Q2 GDP confirmed recession, so we wouldn’t get too upbeat despite beating consensus. AUD/NZD remains a buy on dips, targeting 1.25, where it would probably be already if active accounts weren’t ultra-cautious over the cash squeeze into quarter end.


Westpac Strategy, 0800 922 239

With contributions from Westpac Economics


Events Today

Country Release Last Forecast

NZ Sep NBNZ Business Confidence –20.5% –

Aug Building Consents s.a. 4.7% –2.5%

Aus Aug Private Credit 0.5% 0.4%

Aug Dwelling Approvals –2.3% –2.0%

Aug Retail Sales (s.adj) 1.4% –0.5%

US Jul S&P-CS House Prices –15.9% –16.0%

Sep Chicago PMI 57.9 50.0

Sep CB Consumer Confidence 56.9 52.0

Fedspeak: Hoenig, Lockhart

Jpn Aug Unemployment Rate 4.0% 4.1%

Aug Industrial Production 1.3% –1.3%

Aug Real Household Spending %yr –0.5% –1.3%

Aug Housing Starts %yr 19.0% 49.8%

Eur Sep CPI Flash %yr 3.8% 3.5%

Ger Aug Retail Sales –1.5% –1.0%

Sep Unemployment Change –40k –20k

UK Sep GfK Consumer Confidence –36 –40

Q2 GDP (F) flat a flat

Q2 Current Account Balance £bn –8.4 –9.7

Q2 Business Investment (F) –1.9% a –1.9%

Can Aug Industrial Product Prices 0.4% –0.5%

Jul GDP 0.1% 0.1%


Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 30 September 2008. 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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