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Monday December 1, 2008 - 21:16:53 GMT
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FX Research - Morning Report

Morning Report  Tuesday 2 December 2008


News and views


This week's mood reverts to the negative sentiment prevailing two weeks ago. US equities fell over 5% on an awful ISM release, one part of that index at a 60 year low. Combined with recent PMI figures for Eurozone, UK, Russia, and China at record lows, and well below expectations, we have a bigger picture of markets not yet discounting the bad news. Until expectations are lower than the actual readings, a positive medium-term reversal in equities and risk-currencies is unlikely to occur.


The NZD fell overnight in Europe with the poor news and the fall in US equities, from above 54 cents to just above 53 cents, and is currently tracking sideways at around 0.5350.  Interest rates for 3 month bank bills fell a whopping 38bp, and expectations for a larger 150bp cut on Thursday are increasing. The size of the RBA's interest rate cut, announced today at 16:30, will be the highlight event.


AUD also fell on the above bad news, from around 0.6480 to just above 0.6380, but recovered better than the NZD did, and is currently around 0.6550. The AUD/NZD cross has broken through the initial target of 1.20, in fact touching 1.21.


The EUR fell from around 1.27 to briefly dip under 1.26, but has recovered somewhat to 1.2660. USD/JPY had one of the largest currency falls reflecting a new safe haven rush, from around 95.30 to just above 93, and is currently not higher at 93.30.


US factory ISM falls from 38.9 to 36.2 in Nov. The factory ISM continued its three month plunge in November, falling to its lowest since 1982, when quarterly GDP growth was printing as low as -6% annualised. Almost all the activity components continued to slide, indicating a steeper pace of

decline than in October. New orders fell below 30, pointing to likely further slides in the other activity indices in coming months. The exception was exports which fell at the same pace as in October, after solid growth through the first three quarters of 2008. Prices continued to fall sharply, to a six decade low, reflecting lower fuel, food and other commodity prices.


US construction spending fell 1.2% in October, exactly in line with Westpac's forecast, but there was a surprise substantial upward revision back in August (from 0.3% to 2.4% growth) which should impart a positive bias in the next revision to Q3 GDP growth due in the final report later this month.


Japanese wages slip -0.1%. The sharp fall in production is already weighing on labour incomes with wages dropping -0.1%yr in  Oct, vs expectations of a slight +0.1%yr gain.


Euroland factory PMI for November was revised down from 36.2 to 35.6, making that index's already steep decline even steeper. The factory PMI is now at deeply recessionary levels. That point was accentuated by the further 1.6% slump in German retail spending at the start of the fourth quarter.


UK factory PMI collapsed again in November, to a new record low at 34.4, a level that we expect would be consistent with a decline in Q4 GDP growth of 1% or greater (we will firm up that view once the services PMI is released later this week). This news, the lack of substantial “front-loading” in last week's fiscal stimulus package and the likelihood that November inflation will tumble from 4.5% yr to around 3.7% yr, means we are inclined to expect a Bank of England rate cut somewhat steeper than the 50bp we had been forecasting for this Thursday. A 75bp cut is probably more likely than 100bp given the stated view in the policy committee minutes to the November meeting that there is some merit in the argument that scope needs to be left to allow for further rate cuts (i.e. don't do it all at once!). Other data included weak consumer and mortgage lending figures for October.


Canadian GDP growth accelerated from an upwardly revised 0.6% annualised in Q2 to 1.3% in Q3, despite a slightly weaker than expected 0.1% gain in the September monthly GDP report.






Our NZD bias is back to negative, after last week's temporary reversal, and 0.52 is now vulnerable during the week. Today,  an RBA cut of 100bp would be higher than expected, and support the AUD, and, to a lesser extent, the NZD. A 75bp move would likely be neutral, while any less would add to the current negative sentiment surrounding the currencies.



Events Today

Country Release Last Forecast

Aus Q3 Current Account Balance AUDbn –12.8 –12.8

Q3 Net Exports Contribution to GDP, ppts 0.0 –0.4

Q3 Public Sector Spending 1.8% 0.9%

Oct Retail Sales (s.a) –1.1% –0.4%

RBA Policy Announcement (2:30pm) 5.25% 4.50%

US Nov Auto Sales mn ann’lsd 10.6 9.8

Fedspeak: Plosser

Jpn Nov Monetary Base %yr 1.4% –

Eur Oct PPI %yr 7.9% 7.4%

UK Nov PMI Construction 35.1 35.0


Latest Research Papers/Publications

• NZ Weekly Forex Outlook (1 December)

• RBNZ MPS Preview (28 November)

• 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 (


Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 2 December 2008. 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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