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Tuesday November 18, 2008 - 20:06:08 GMT
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Forex Research - Morning Report

Morning Report Wednesday 19 November 2008


News and views

Following the pattern of recent weeks, non-US currencies tracked the equity indices closely overnight. The Dow Jones index rose 2.5% in the early US session, but has given up that gain at the time of writing. Most currencies are currently around the levels prevailing at yesterday’s NZ close. Noteworthy news from the Asian session was the bailout of China’s third largest securities house – its financial sector is not entirely immune from adverse global conditions.


NZD, after trading in a narrow range of 0.5480 to 0.5520 during yesterday’s NZ session, rose to around 0.5560 on the Dow’s early gains. It is currently back to 0.5520, and is likely to continue tracking the Dow this morning. Bearish news released yesterday included Fonterra’s announcement on a revised (likely downwards) milk payout, as well as Prime Minister John Key’s expectation of a wider budget deficit. Interest rates fell by 6 basis points for 10 year maturities. Today’s release of third quarter producer prices will be largely ignored by the market since the Q3 CPI is already known..


AUD traded in a tight range of 0.6580 to 0.6430 during yesterday’s Australian session, and rose to almost 0.66 after the Dow’s rise. It is currently around 0.6480. The correlation between equities and the AUD remains, although it has been decreasing over recent days. The RBA released the minutes of its previous rate cut meeting, revealing their desire to arrive at a “neutral” (i.e. where the economy is stable) monetary policy stance sooner rather than later. The market was mildly disappointed in the minutes’ contents because there was no clear indication that the next cut would be the anticipated 100 basis points, rather than 50 or 75, and a miniscule selloff in interest markets ensued.


EUR also tracked the Dow, and rose to around 1.27, before falling to its current 1.26 area. Some significant buying of EUR/JPY was seen during the European session, affecting both currencies for a few hours only. JPY continues to attract flows as a safe haven currency.


US PPI slumps 2.8% in Oct. The PPI posted its steepest one month fall in the lifetime of anyone who could possibly be reading this. At the output stage of production, gasoline prices collapsed 25% in the month; food prices edged 0.2% lower; auto prices were slashed 1.7% but surprisingly light truck prices rose 2.6% on top of September’s 1.0% gain (hence the sticky 0.4% core rate). Intermediate and crude prices tumbled further in October, paving the way for continued retracement of the PPI gains we saw up until July this year. The PPI annual rate fell from 8.7% yr to 5.2% yr but the core PPI accelerated from 4.0% yr to 4.4% yr, however to the extent that the latter is a lagged function of the former, the core rate should begin to ease presently.


US September TIC data, including upward revisions to August, revealed the capital inflows/repatriation which has been a big driver of US dollar strength in recent months. In Sep capital inflow was worth $143bn.


US policy-makers testified before the House Financial Services Committee on how the Trouble Asset Relief Program is proceeding. Congressmen and women’s lines of questioning certainly demonstrated some dissatisfaction with how the $700bn is being used, including the lack of funds directed at preventing mortgage foreclosures. Fed chair Ben Bernanke said “The value of the TARP in promoting financial stability has already been demonstrated... [and it] will be critical for restoring confidence and promoting the return of credit markets to more normal functioning.”.


The NAHB homebuilders’ confidence index plumbed new depths in November, falling from 14 to 9. Falling house prices, rising foreclosures and reduced access to credit are hammering the market for new homes.


UK inflation eases from 5.2% yr to 4.5% yr in Oct. UK inflation eased sharply in October, not quite to Westpac’s bottom of the market 4.3% yr forecast, but well below the consensus 4.8% yr view (demonstrating the conservative nature of consensus forecasts during times of rapid change). In the month, the CPI fell 0.2%, thanks to lower oil, transport and food costs. These in turn fed through to softer core inflation (1.9% yr), confirming that the recent rise in the core rate was a temporary.



The NZD retains its weak bias. Today’s action should be confined to a narrow 0.5475 to 0.5560 range, barring equity market surprises. During the next week, we expect 0.58 to cap any rise, while 0.5350 is a key support level which, if broken, does not augur well for the NZD.


Events Today

Country Release Last Forecast

NZ Q3 Producer Output Prices 3.5% 1.5%

Q3 Producer Input Prices 5.6% 2.0%

Aus Sep Westpac-MI Leading Index 2.5% –

Oct Motor Vehicle Sales 0.4% -0.8%

RBA Speakers: Gov Stevens and Asst Gov Edey

US Oct Consumer Price Index/Core flat/0.1% -1.2%/0.2%

Oct Housing Starts/Permits -6.3%/-6.1% -3.0%/-3.0%

Oct 29 FOMC Minutes

Fedspeak: Kohn, Lacker

Jpn Sep All Industry Index %mth -1.8% -0.1%

UK Nov BoE Minutes

Can Oct Leading Index -0.2% -0.2%


Latest Research Papers/Publications

• NZ Weekly Forex Outlook (17 November)

• NZ Q3 Retail Sales Review (13 November)

• NZ Economic Overview November 2008 (11 November)

• NZ Weekly Forex Outlook (11 November)

• NZ Weekly Forex Outlook (4 November)

• NZ Q3 HLFS Review (6 November)

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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