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Wednesday October 15, 2008 - 20:28:50 GMT
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FX Research - Morning Report T

Morning Report Thursday 16 October 2008


News and views

Safe haven or repatriation demand drove USD Index higher once more as the DJIA opened weaker and sank -500pts by the NY afternoon. Poor US data (retail sales, NY Fed manufacturing sentiment survey) helped fuel the selling of equities and risk FX. Fed chief Bernanke promised the Fed would do it all it could but he sounded suitably gloomy about the near term economic outlook. NZD/USD touched its 0.6277 in the London morning as equities staged a fleeting rally but was smacked down to 0.6065 in NY trade.

The extension of DJIA losses dragged AUD/USD down more than 3 cents, from its London probe above 0.7050 (high 0.7077) to 0.6725 in the NY afternoon.


EUR/USD pushed above 1.3680 in London but in line with broad USD recovery, retreated to 1.3525 in NY. The ECB announced it would accept a broader range of collateral to help improve liquidity, which did help Euribor rally about 10bp.


USD/JPY mostly chopped around 101.00-101.60 until the NY afternoon when risk appetite deteriorated anew, pulling the pair down to 100.60.


US retail sales down 1.2% in Sep. With 3 month annualised sales down 4% in Q3, it is now crystal clear that real consumer spending contracted quite sharply in Q3, for the first time since the early 1990s.


NY Fed factory index plunged to -25 in Oct, its lowest reading since the survey was begun seven years ago. Being a survey of factory bosses rather than an actual count of production and orders and so-forth, it is possible that responses were weighed down by all the doom and gloom being espoused by policy-makers in their efforts to justify the $700bn Paulson plan and the nationalisation of the banking system. Or, the responses could reflect bosses’ concerns that their banks are no longer rolling over their overdraft borrowing. Whatever the precise reason, it is clear that business confidence has taken a big hit over the past month.


US PPI fell 0.4% in Sep due to lower energy prices but the core up 0.4% revealed some price pressures still percolating in the factory sector, most notably for autos and light trucks which was surprising given plunging sales. But the inflation outlook remains favourable with input and intermediate prices now falling and the economy slipping into recession. Other data included a 0.3% rise in business inventories in August.


The Fed Beige Book reported evidence of weaker activity across the US in September. Consumer spending was down in most districts (consistent with the retail sales figures); manufacturing, housing and services were mostly softer, and credit conditions were described as “tight” across all districts. Inflation pressures moderated a little, though many districts reported ongoing pass-through of earlier price increases for metals, food and energy.


Fed Chairman Bernanke cautioned that economic growth is likely to remain below potential for some time, even after confidence in the financial system returns.


Euroland inflation was confirmed at 3.6% yr in Sep (unrevised from the flash estimate), and the core rate was unchanged at 1.9% yr. With pipeline price pressures easing and the economy in recession, inflation will fall well below 2% by 2010.


The Norwegian central bank cut rates by 50bp to 5.25% matching the Swedes and other major banks’ moves last week.


UK jobs market continues to slump. Unemployment posted another 30k+ gain in Sep; the household survey jobless rate jumped a further 0.2 ppts in August to be up 0.5 pts in just three months; and employment contracted in the three months to August by 122k. That compares to gains of 148k, 126k and 47k in the previous three quarters, so steadily slower job gains have now given away to steep job losses. Earnings growth eased to its slowest pace in five years in August.



At the margin, the lack of long NZD longs to be unwound still helps the currency versus AUD during risk aversion surges and vice versa. NZD/USD direction remains tied to USD safe haven demand which we are inclined to see waning in coming weeks after the slew of aggressive government action.


Latest Research Papers/Publications

• NZ Q3 CPI Preview (14 October)

• NZ Weekly Forex Outlook (14 October)

• Big bang vs creationism (13 October)

• NZ Q3 QSBO Review (7 October)

• NZ PREFU Review (6 October)

• NZ Weekly Forex Outlook (6 October)

• NZ Q3 Employment Confidence Index (1 October)

These papers/publications are available on Online Research on Westpac

Institutional Bank’s website (


Events Today

Country Release Last Forecast

Aus RBA Monthly Bulletin

US Sep CPI –0.1% –0.1%

Sep CPI Core 0.2% 0.2%

Initial Jobless Claims w/e 11/10 478k 470k

Aug TIC Data $bn 6.1 30.0

Sep Industrial Production –1.1% –0.8%

Oct Philadelphia Fed Index 3.8 –10.0

Oct NAHB Housing Market Index 18 16

Fedspeak: Bullard, Evans

Can Aug Manufacturing Shipments 2.7% –




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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