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Thursday October 2, 2008 - 20:48:37 GMT
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Forex Blog - Morning Report

Morning Report  Friday 3 October 2008


News and views

Risky assets were hit hard again overnight, as traders digested more bad economic news and credit markets remained under lockdown. The US bailout package remains a key risk for markets – while the US Senate voted in favour of the package yesterday, there is still no assurance that the House (expected to vote tomorrow) will approve it in its current form. US equity indices were down 3-4% at the time of writing, and 3-month interbank lending rates rose to a record 220bp above the Fed’s policy rate. The US dollar gained against most of the other majors, with the widely-followed DXY index reaching its highest level in a year. NZD and AUD were the major underperformers, down more than 2% over the last 24 hours. The euro was also down sharply after the ECB hinted that a rate cut is possible in the near future.


US factory orders down 4% in Aug. Factory orders fell sharply, as expected, given the known decline in durables and the energy-price driven fall in the non-durable component. Factory inventories posted a further 0.6% gain which suggests that stock rundown should not be the drag on Q3 GDP growth that it was in Q2.


US initial jobless claims edged up to 497k last week, a level that has been surpassed only once this decade, in the aftermath of the September 11 terror attacks in 2001. Ongoing hurricane-related disruption and genuine weakness in labour markets were factors cited by the Labor Dept. Continuing claims rose to their highest in five years.


The European Central Bank left its repo rate unchanged at 4.25% following last night’s Council meeting. In the press conference ECB chief Trichet said that “upside risks to inflation have diminished but not disappeared”. That compares to “upside risks to price stability over the medium term prevail” in the September press conference. He also sounded more sombre about the prospect for a recovery in GDP growth from the current weak patch, and noted that uncertainty had increased to “exceptionally high” levels given intensified financial market turmoil. Reflecting this assessment, Trichet admitted that two courses of action were considered today: no change and a rate cut. Depending on the data flow and other events over the next month, a rate cut as soon as the November policy meeting on 6/11 now seems plausible, though Trichet gave no clear signal that rates would be cut next month, and denied that the ECB has an explicit “easing bias”, in response to a question. Nevertheless the case is now strong enough for us to formally pull forward our ECB rate cutting cycle commencement from Q1 next year to the current quarter.


UK construction PMI 38.8 in Sep: deeply recessionary levels, despite ongoing concerns about a housing shortage in the UK. Hard to believe that just over one year ago, in August 2007, this index was at a cyclical high of 65.0. At they same time, annual house price declines are now clearly in double digit territory, at –12.4% yr on the Nationwide measure. Not unrelated, the Bank of England published its Q3 credit conditions survey. The net balance of lenders reporting diminished credit availability to households was 39%, with 32% (net) expecting conditions to tighten further. The survey predates the latest round of financial sector implosion, with a cut-off date of September 17, so it may understate the tightness of credit conditions



In this difficult credit environment, further weakness is likely for currencies that need to fund current account deficits. In particular, with the AUD reaching a new low for the year against the yen, a fresh round of selling by margin traders could be on the cards.


Westpac Strategy, 0800 922 239

With contributions from Westpac Economics


Latest Research Papers/Publications

• NZ Q3 Employment Confidence Index (1 October)

• NZ PREFU Preview (29 September)

• NZ Weekly Forex Outlook (29 September)

• NZ Q2 GDP Review (26 September)

• NZ Q3 Consumer Confidence (24 September)

• NZ Weekly Forex Outlook (22 September)

• NZ Q2 Current Account Review (19 September)

These papers/publications are available on Online Research on Westpac

Institutional Bank’s website (


Upcoming Events

Date Country Release Last Forecast

3 Oct Aus Sep TD-MI Inflation Gauge 0.1% –

US Sep Non Farm Payrolls –84k –125k

Sep Unemployment Rate % 6.1% 6.0%

Sep ISM Non-Manufacturing 50.6 49.5

Fedspeak: Bullard

Eur Aug Retail Sales –0.4% –0.2%

UK Sep PMI Services 49.2 48.5

Q2 Mortgage Equity Withdrawal £bn 5.0 2.5

6 Oct NZ 2008 Pre-election Economic & Fiscal Update

Aus Labour Day Holiday (NSW, SA, ACT)



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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