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Wednesday November 19, 2008 - 20:27:02 GMT
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FX Research - Morning Report

Morning Report Thursday 20 November 2008


News and views

Currencies remain rangebound, with the overall trend dictated by major global equity markets, and punctuated by the occasional large foreign exchange transaction (such as occurred last night in Europe). Comments from policymakers in the US and down under indicate a gloomy outlook for some time yet.


NZD abruptly stopped hugging the 0.55 level during the European session when the large EUR and GBP orders were seen. The 70 pip spike upwards lasted about 4 hours, and this morning sees it trading slightly under its previous level, at 0.5480. The slightly softer tone likely due to the Dow Jones index down by 3.2% at time of writing. Fonterra announced their issue of a 5 year GBP 225 million bond. Blue chip NZ companies can access credit internationally, but must pay the price – in this case, a credit spread of 450 basis points.


AUD was locked in a tight range of 0.6470 to 0.6490 before the orders, and spiked to 0.6580. Similarly to the NZD, it is currently softer at 0.6470.


The main action last night was in the EUR and GBP, with very large buying orders, seen in both. EUR jumped from around 1.26 to 1.28 as the transactioned was cleared by the market, and returned to its previous level afterwards, for no net change on the day. As expected, US CPI inflation, including the core measure, was lower, and retains the case for continued easing. China continued the risk aversion theme by saying US treasury bonds remain the preferred safe

haven asset.


US CPI drops 1.0% in Oct. The US CPI headline posted it steepest slump since at least World War 2 when the current index was first devised, with the first significant monthly decline (–0.1%) in the core CPI since 1982 contributing to that result. Retail gasoline prices fell “only” 14.2% in October, less than the 20% fall that we had expected based on weekly data from the Department of Energy. That explains all of the difference between the –1.0% outcome and Westpac’s –1.2% forecast. Food prices surprised with a 0.3% gain (they should start falling imminently) but apparel off 1.0%, new vehicle prices down 0.5%, airfares down 4.6% and hotel accommodation down 1.6% provided plenty of offset. Also there were below trend gains for medical care (0.2%), owners’ equivalent rent (0.1%) and recreation (0.1%). With gasoline prices still plunging, food about to become a drag, prices being discounted to stimulate sales, lower transport costs being passed on to retail prices (such as airfares) and the US dollar rising the CPI will continue to fall sharply, contributing to lower inflation expectations and demolishing any vestigial arguments against further Fed easing.


US housing data were sickeningly weak. Starts posted another 4.5% decline in Oct, but in the detail we saw that new permits to build single family homes nose-dived nearly 15%, confirming that new house-building activity is about to step down sharply yet again, dashing hopes that the drag on the economy from new housing investment might soon diminish.


The minutes of the 28-29 Oct FOMC meeting revealed an appropriately gloomy outlook on the US economy. Members saw little or no growth in 2008, and forecasts for 2009 ranged from -0.2% to 1.1%. Inflation was expected to “diminish materially”, with some highlighting a risk of deflation, and unemployment was forecast to peak above 7% next year. There was some debate as to the efficacy of a large rate cut, given that rates were already very low, but the committee agreed that it would do whatever was necessary to support the economy.


The Bank of England published the minutes to the Nov policy meeting when they cut rates 150bp to 3.0%. They revealed a unanimous 9:0 decision, and discussion of potentially cutting rates 200bp at the time, However the minutes noted that likely fiscal stimulus to be announced Monday in the Pre-Budget-Report, and a desire to keep some rate cutting in reserve to provide a future confidence boost saw them limit the cut to 150bp on the day – which was still a big surprise at the time.


Canadian leading index down 0.3% in Oct, pointing to a deteriorating economic outlook for 2009 even though Canadian domestic economic data has held up relatively well until now.



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

Aus RBA Monthly Bulletin

US Initial Jobless Claims w/e 15/11 516k 505k

Nov Philadelphia Fed Index –37.5 –40.0

Oct Leading Indicators 0.3% –0.7%

Jpn Oct Trade Balance ¥bn, nsa 88.5 71.8

Ger Oct PPI %yr 8.3% 7.5%

UK Oct Retail Sales –0.4% –0.6%

Oct PSNCR £bn 12.6 –2.5

Oct Money Supply M4 %yr 12.4% 12.7%

Can Sep Wholesale Sales –1.5% –0.5%


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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AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
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A 14:00 US- CB Consumer Confidence
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AA 12:15 US- ADP Private Payrolls
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