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Sunday October 19, 2008 - 19:42:28 GMT
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Forex Blog - Morning Report

Morning Report  Monday 20 October 2008


News and views

The late sell-off in US equities helped DXY  produce a modest gain (about 0.5%) in London/NY Friday in uncertain, illiquid trade. Woeful US economic data (housing starts, consumer sentiment) had surprisingly little impact but of course adds to underlying concern over the economy’s prospects even once money markets thaw. Hedge fund failures were in the news again with the Telegraph (UK) reporting that London’s Gradient Capital Partners (European equities) is -63% YTD, “on the brink of collapse.” The DJIA traded a 560 point range, closing on the lower side of it, -127pts, -1.4% but the S&P 500 fell only 0.6%. NZD/USD dipped as low as 0.6077 in London and rose as high as 0.6202 in NY, finishing at 0.6120, again taking its cue from risk sentiment as proxied by the Dow.


AUD/USD’s 0.6734 – 0.7008 range (closing 0.6890) was modest by recent standards. The McCrann article playing down prospects of an RBA Nov cut stirred plenty of interest in AUD money markets. “Precious” metals fell as the US dollar rose but most base metals posted good gains on the LME.


EUR/USD lacked direction, chopping around in the 1.3400s with only a few brief forays below the figure. European equities posted strong gains e.g. Euro Stoxx 50 +4.5% despite tension ahead of ING’s profit results (its shares fell 27%).


USD/JPY bumped around the low 100.60s in London but rallied to 101.70 at the NY close, less blatantly fixated with equities than usual.


US housing starts down 6.3% in Sep. Housing starts and permits continued to slump in September, despite the unwind of the distortion caused by the July 1 building code change in New York now being mostly complete. That distortion saw multiple starts and permits pulled forward from Q3 into June and subsequently fall away sharply in July and August. But in September, multiple starts actually rose 7.5% (including a 70% rebound in the north-east). However single family starts, unaffected by the distortion, fell 12.0%, their steepest monthly decline since they plunged 13.9% in January 2007. Single family permits fell by just less than 4% but at 532k annualised remain below single family starts on 544k annualised so there is no indication there that starts are about to rebound. The bottom line is that the new housing market is continuing to sink.


US consumer sentiment reversed almost all of the gains of the prior three months in October, by plunging about 13 pts – its steepest one month fall for decades. It is clear that the message from policy-makers is getting through – the US economy is sliding into recession, corporate failures will follow bank failures and unemployment will rise sharply.


Japanese tertiary activity contracted in August. The year-ended pace has collapsed from +0.7% to -2.3%. Focusing on year-ended outcomes by sector, we note that transport has been hammered by the rise in fuel prices (-3.2%), wholesale and retail are struggling to attract consumers in an environment of declining real incomes (-1.4%), while externally related sections of the financial system are showing major slowdowns (securities brokerage -45.3%, FX clearing -24.9%). Real estate has kept its head above water, but even here they are major pockets of weakness (condominiums -18.9%). Topping things off, business services are down 1.3%.


Euroland trade deficit €6.1bn in Aug. The record trade deficit in July was followed by another sizeable deficit in August. The deficit should narrow further as lower oil prices cut into import values, but full year 2008 is likely to record a modest overall deficit.



The 100bp cash rate cut we expect from the RBNZ on Thursday should help limit the scope of any NZD/USD rallies. 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.


Latest Research Papers/Publications

• RBNZ OCR Preview (17 October)

• 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)

These papers/publications are available on Online Research on Westpac

Institutional Bank’s website (


Events Today

Country Release Last Forecast

NZ Sep Electronic Card Transactions 0.8% –

Aus Q3 PPI 1.0% 2.2%

Sep Merchandise Imports, AUDbn 18.5 –

US Sep Leading Index –0.5% –0.4%

Fedspeak: Lockhart

Ger Sep PPI %yr 8.1% 7.4%

UK Oct House Prices %yr –3.3% –8.0%

Sep PSNCR £bn 5.1 10.0

Sep Money Supply M4 %yr 11.5% 11.0%

Can Aug Wholesale Sales 2.3% 0.3%




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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