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Wednesday November 26, 2008 - 20:40:52 GMT
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FX Research - Morning Report

Morning Report Thursday 27 November 2008

 

News and views

A lot of US economic data was released night, most of it weaker than expected. Durable goods orders were particularly awful, falling by 6.2% against expectations of -3%. When so many data readings are actually worse than expected, this tells us that the market has not fully priced in the adverse economic conditions, a necessary condition for a sustained turnaround in the markets. In spite of this, the Dow has maintained its recent strength above the key 8000, this morning at 8520.

 

NZD: The mild positive sentiment continued for the third day, and overnight action, while uneventful, saw it reach a high of 0.5516. It is currently unchanged from that level, but all eyes will be on the merchandise trade release this morning and the NBNZ business confidence number this afternoon. Both have the potential to affect the NZD today.

 

AUD: Breaching 65 cents late in the US session, to a high of 0.6517, confirms the positive short-term tone to this currency. Yesterday’s news that third quarter construction work done was much higher than expected supports the mood.

 

Demand for the EUR fell on market pessimism over the adequacy of a European stimulus package released last night; it is worth EUR200 billion, equivalent to 1.5% of GDP. From an early high of 1.3028, EUR stepped downwards to its current 1.2870. Japanese fund managers were seen aggressively selling EUR/JPY late in the US session.

 

USD/JPY is locked in a narrow 94.6 to 95.6 range. China cutting its rates by 100 basis points yesterday limited any JPY rallies, given JPY’s role as a weak proxy for the CNY.

 

US personal income and spending reports showed an increasingly cautious consumer. Income rose by a stronger than expected 0.3% in October, while the 1% fall in spending was the largest drop since September 2001, but was in line with expectations. The surprise was that only about half of the drop could be attributed to prices, with gasoline prices tumbling through October; the remainder points to a sharp pullback in sales volumes.

 

US durable goods orders fell 6.2% in Oct, more than expected. The 11.1% drop in transportation orders had been flagged by a sharp drop in plane orders from Boeing, but the 4.4% drop in ex-transport orders points to broad-based weakness in the industrial sectors.

 

The Chicago PMI fell further to 33.8 in November, the lowest level since 1982. Production picked up slightly but new orders continued to slump, reaching 27.2 compared to 60.2 just three months earlier. As in other region factory surveys, the employment component slid further, from 41.5 to 33.4 – more confirmation that the official payrolls figures are about to get even worse.

 

US initial jobless claims fell by 14k to 529k last week. The previous week may have been distorted by the Veteran’s Day holiday, but the overall picture is a steep uptrend in recent months. Continuing claims also pulled back from 4016k to 3962k in the previous week.

 

US new home sales fell 5.3% in Oct, in line with expectations. Sales of existing homes continue to cannibalise new home sales, and the drop in mortgage rates after the mortgage agencies Fannie Mae and Freddie Mac were nationalised in September proved to be shortlived. The median sale price fell 1.7% to $218k, leaving an annual rate of decline of 7%.

 

Nov University of Michigan sentiment index for was revised down to 55.3, a new low for this cycle. The current conditions index also reached a new cycle low of 57.5, while expectations fell to 53.9 but held above the June low of 49.2. Inflation expectations a year ahead fell from 3.9% to 2.9%, reflecting the drop in gasoline prices.

 

German inflation fell sharply from 2.4% to 1.4% in the first estimate for November. Falling fuel prices, and base effects as large monthly gains from a year ago drop out of the annual figures, will see a sharp pullback in annual inflation across the euro area, putting more pressure on the ECB to ease interest rates.

 

The European Commission announced a fiscal stimulus plan for member states totaling around EUR200bn, or 1.5% of GDP. Each member will develop their own plans for how the stimulus will be provided.

 

China’s central bank cut its benchmark lending rate by 108 bps to 5.58%, the fourth cut since September and the largest in 11 years. Reserve requirements were reduced from 17% to 16 for the largest banks, and from 16% to 14% for the others. The move reflects a rapid shift in stance by policy makers, from containing inflation to avoiding a severe slowdown (GDP growth below 8%, as a rule of thumb).

 

Outlook

The positive tone in NZD should continue over the next day, although today’s US Thanksgiving holiday will reduce market liquidity and potentially increase volatility. A range of 55 cents to 56 cents should suffice for the day, with the caveat regarding volatility.

 

Events Today

Country Release Last Forecast

NZ Oct Merchandise Trade NZDm –1,183 –1,000

Nov NBNZ Business Confidence –42.3% –

Aus Q3 Capex 5.7% –0.5%

2008/09 CAPEX Intentions, AUDbn 99.8 –

US Thanksgiving Day

Jpn BoJ Monetary Policy Meeting Minutes

Eur Oct Money Supply M3 %yr 8.6% 8.3%

Nov Retail PMI 44.3 –

Nov Business Climate Index –1.34 –1.40

Nov Consumer Sentiment –24 –24

Nov Economic Confidence 80.4 79.5

Ger Nov Unemployment Change –26k 0k

 

Latest Research Papers/Publications

• NZ Weekly Forex Outlook (24 November)

• 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)

These papers/publications are available on Online Research on Westpac

Institutional Bank’s website (www.wib.westpac.co.nz)

 

 

 

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 www.westpac.com.au 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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