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Thursday December 4, 2008 - 21:16:28 GMT
Westpac Institutional Bank - www.westpac.co.nz

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FX Research - Morning Report

Morning Report Friday 5 December 2008

News and views

Official interest rate cuts dominated financial events last night: the Europe's ECB by 75 basis points (the largest in its history), the Bank of England by 100bps, and Sweden by a hefty 175bps. In the US, Fed Chairman Ben Bernanke said property foreclosures were more costly to an economy than bailouts, and suggested government assistance to homeowners could be offered. Major equity indices in Europe posted modest falls, the S&P500 down 1.8% as we write.

NZD broke above short-term 0.5350 resistance and almost touched 54 cents before falling back to 0.5320 where it currently sits. The immediate optimism generated by Europe's generous rate cuts has dissipated, demonstrating the underlying mood is still bearish. This pessimism is likely a consequence of NZ's image as a commodity currency, and will continue to slump with commodity markets.

AUD remains stuck in its 3-day range of 0.64 to 0.65, after last night's breakout up to around 0.6540 could not be sustained. It currently sits around 0.6430, little drama expected here today. The AUD/NZD cross maintained its sideways trajectory at 1.21.

European currencies were the star performers last night, the market applauding the ECB by rallying EUR from 1.2550 to around 1.2850, although it has consolidated at 1.2750. GBP similarly jumped from the 1.4470 area to a little over 1.48, and rests at 1.47.

US factory orders down 5.1% in Oct. Factory orders fell for the third month running, led by mostly known weakness in durables (revised down from -6.2% to -6.9%) as well as lower energy prices which weighed on the non-durable component.

US initial jobless claims fell for the second week, down 21k to 509k, but remained above 500k for the fourth week running, the longest such string since the early 1980s recession. Continuing claims rose to a new 26 year high in the prior week. So no joy there for the labour market.

Fed chair Ben Bernanke urged using more taxpayer funds to prevent home repossessions. The government could buy delinquent mortgages or subsidise lender discounts to struggling borrowers, or even directly subsidise borrowers' interest payments. Bernanke argued that the economic cost of these measures could be less than that associated with foreclosing when a mortgage goes into default.

Japan CAPEX highlights ongoing weakness in capital spending. The Q3 MoF CAPEX survey showed investment spending declining to -13.0%yr in Q3 from -6.5%yr in Q2, a sixth straight decline in the annual pace. Ex-software growth pace also fell further to -13.3% y/y from -7.6%yr. This was weaker than median forecasts for -10% y/y, and suggests downward revision to the private non-residential fixed investment component of GDP.

The European Central Bank cut its repo rate 75bp to 2.50% following today's Council meeting. At the press conference there was no mention whatsoever of upside risks to inflation for the first time in years! On the data front, Euroland Q3 GDP growth was confirmed at -0.2% although the annual growth was revised back from 0.7% yr to 0.6% yr. Household spending was flat in the quarter and the year, the latter its weakest since the early 1990s.

The Swedish Riksbank almost halved its target rate 175bp to 2.0% at an unscheduled meeting today, to "deal with the economic downturn and at the same time achieve our 2% inflation target".

The Bank of England slashed its official rate by another 100bp to 2.0% following this week's monetary policy committee meeting. On the data front, HBoS reported house prices down 2.6% in November, for an annual decline of 14.9% yr.

Canadian data was soft, including the lowest Ivey PMI (40.2 in Nov) for a decade, and a 15.7% fall in Oct building permits.

Outlook

Despite better news from Europe last night, the NZD could not follow through. This tells us that the NZD will continue to lose ground against safe havens USD and JPY, as well as EUR and GBP. On the day, we should stay inside this week's range of 0.5250 to 0.5350.

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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