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Thursday November 20, 2008 - 20:15:49 GMT
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FX Research - Morning Report

Morning Report 21 November 2008


News and views


Last night's market action was highly significant, and takes us into new trading territory. The catalyst, as has been the case for the past few months, was global equity market selling, with the Dow falling below the important 8000 level. Should that index close weakly in a few hours time, we become even more confident that currency and risky asset prices will move to a much lower trading range. Overnight news was overwhelmingly bearish: the Fed's vice chairman says the risk of deflation is now higher, the US data release on jobless claims was grim, and the ECB admits the crisis has deepened. Even safe-haven Switzerland has suffered, and cut their official interest rate by 100 bp last night.


NZD sat stubbornly just above 0.54 during our day yesterday, but once the Dow gapped lower, NZD stops were triggered, and it quickly sank to a low of 0.5275. It is currently trading at slightly under 0.53. All eyes today will be focussed on Fonterra's noon announcement of their revised dairy farmer payout. Two year interest rates fell yesterday by 8 bp, and we expect more of the same today.


AUD was also affected by the key break in the Dow, falling to a low of 0.6160, and is poised to push lower as we write. The RBA has reached what they considered a neutral cash rate, but will continue to cut as they fear a stall in the economy, while the government will take the fiscal approach.


EUR was relatively subdued, which is a reflection of its non-high yield status, trading around the 1.25 level. JPY was more volatile, but is little changed over the past 24 hours, trading at around 0.95.


US Philly Fed factory survey down from -38 to -39 in Nov. The Philly Fed index slipped even further in November after slumping 41.3 pts in October. It is now clearly below the low-point of the 2001 recession (-37.2) and not far off the -48.2 low-point in the 1990 recession. The detail was mostly weaker, with a 7.2 pt decline to -25.2 on the jobs measure standing out in the activity components, although the most dramatic component move was the 37.9 pt collapse in the Philly Fed began this survey forty years ago.


US leading index dropped 0.8% in October, with all of that decline explained by the collapsing equity market. The other nine components were mostly offsetting, with strong rises in money supply and the yield spread, but falling building permits and consumer confidence.


US initial jobless claims surged a further 27k to 542k last week on top of the prior week's 31k jump. The Labor Dept reported no special factors at play - other than lots of layoffs! Continuing claims also continued their rapid uptrend, rising above 4 million for the first week since the early 1980s. With the payrolls survey for November being conducted last week (ended 15/11), the surge in initial claims suggests a serious deterioration in labour market conditions since the October survey week (when initial claims were at 479k). We had a 320k payrolls drop pencilled in for November but risks are it will be an even steeper decline now.


Japanese trade balance back in the red on sharp export decline. Figures for Oct came in well under market expectations of a moderation in the Sep surplus. The balance instead dropped to a JPY63.9bn deficit for the month - a JPY159bn deterioration on Sep's revised surplus of JPY95.1bn. Exports dropped to be down 7.7%yr, the biggest decline since 2001. Imports rose 7.4% and were the main source of the surprise vs expectations.


The Swiss National Bank cut its benchmark rate a further 100bp to 1.0%. This is the third unscheduled rate cut since October.


UK retail sales posted a 0.1% in Oct, although the detail showed that once again the result was flattered by a rise in food store sales, after a string of monthly declines from May to August. Non-food sales were down 1.1% in Oct and 1.3% in Sep, so it is clear that discretionary spending has been cut back sharply. Other UK data included accelerating M4 money supply growth in October (from 12.6% yr to 15.1% yr) which we suspect reflects liquidation of investment assets outside of M4 into cash which is in the M4 definition; and GBP1.4bn public sector net borrowing, the first Oct since 1994 that the public sector has run a deficit. The fiscal position ahead of Monday's pre-budget report has deteriorated sharply.






Our view that NZD is inherently weak in this environment is intact, with our only change being the expected trading range. Previous important support of 0.54 now becomes resistance, with the new support level being 0.50.



Upcoming Events

Date Country Release Last Forecast

21 Nov NZ Oct External Migration ann. 4,407 4,525

Oct Credit Card Transactions 1.1% –

Oct Electronic Card Transact’s 0.8% –

US Fedspeak: Bullard, Lacker, Plosser and Evans

Jpn BoJ Policy Announcement 0.30% 0.30%

Eur Nov PMI Factory Adv 41.1 40.0

Nov PMI Services Adv 45.8 45.5

Can Oct Consumer Price Index %yr 3.4% 3.5%

Oct BoC Core CPI %yr 1.7% 2.0%

24 Nov US Oct Existing Home Sales 5.5% –2.5%

Eur Sep Current Account €bn sa –8.4 –


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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