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Tuesday December 16, 2008 - 21:26:17 GMT
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FX Research - Morning Report

Morning Report Wednesday 17 December 2008


News and views

The headline grabber today is the US Fed’s fresh announcement: a 75bp rate cut, and the new Fed funds rate anywhere between zero and 0.25%. This is much more dovish than was expected, and risk assets have rallied significantly after the news, which was released at 8:15am NZ time as we write. The US data last night was worse than expected: CPI, housing starts, and building permits, but the Fed’s move dominates today. NYMEX oil is down 0.5% to $44, shrinking demand dominating expected OPEC cuts, and copper is down 1%.


After a tiny correction yesterday, the NZD has rallied impressively, to catch-up with the EUR’s earlier lead, and was at the highs around 0.5670 just before the Fed’s decision. It immediately spiked to 0.5735 on the news.


AUD was rangebound around 0.67 until mid-Europe session, when it started a slow rally towards 0.68. The Fed news pushed it immediately to 0.69, and also nudged AUD/NZD to 1.2040, after as low as 1.19 in Europe.


EUR looks strong, at 1.40, and has shrugged off hawkish comments by the ECB head, Trichet. USD/JPY has fallen to 89.20, after hugging 90 last night.


US Fed established a target range for the fed funds rate of 0 to 0.25% (from 1.0% previously). Given “appreciably diminished” inflationary pressures and “the weaker prospects for economic activity”, the Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time... The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.”


US CPI drops 1.7% in Nov; annual rate falls from 3.7% yr to 1.1% yr. The monthly CPI headline posted its steepest slump since current records began in 1947. An essentially flat core rate added to the soft prices picture.


US housing starts plunge 19% in Nov; permits down 16%. There were no obvious distortions from the sometimes volatile multiples component of starts/permits; all four major regions recorded declines. The new build housing market is imploding in the US. Starts are down 73% from their peak in January 2006, to the lowest they have ever been (records began in the 1950s). Why would you buy a new home? Near new homes can be snapped up for 50% less than they were sold by their builders just two years ago in some areas; mortgages are hard to secure; potential buyers are worried about their jobs; and there is a huge over-supply of homes, so prices will fall further.


Japan October tertiary index rose 0.4%mth, beating median projections for a 0.2% fall. This left the gauge of service sector activity at –1.4%yr, a slight moderation from -1.5%yr in September, reflecting a departure from the gradual upward trajectory that saw annual growth of 1.3% in 2007.


Euroland advance PMIs keep slipping in Dec. Not dramatic, with the composite factory/services PMI easing from 38.9 to 38.3. This would be consistent with a Q4 GDP decline of at least 0.5%.


UK inflation eased from 4.5% yr to 4.1% yr in Nov. Fuel prices were down but food prices rose, possibly a function of the recent sharp depreciation of sterling. Nevertheless Bank of England Governor Mervyn King wrote in his open letter to the Chancellor that he expected the CPI to return to 2% target in H1 2009 and then fall lower, possibly requiring a letter explaining a target undershoot of more than 1% later next year. Nothing here to prevent further BoE rate cuts.



The NZD maintains its strength today, and 0.56 provides strong support. The rally should temporarily slow down around the 0.58 chart level.


Upcoming Events

Date Country Release Last Forecast

17 Dec Aus Oct Westpac-MI Leading Index 1.1% –

Nov Merchandise Imports AUDbn 21.9 –

US Q3 Current Account Deficit $bn –183.1 –177.0

Eur Nov CPI (F) %yr 2.1%a 2.0%

UK Dec BoE Minutes

Nov Unemployment ch’ 36.5k 45.0k

Dec CBI Retail Survey –46 –50

Can Oct Wholesale Sales 1.5% –2.0%

18 Dec NZ Half Year Economic and Fiscal Update

Dec NBNZ Business Confidence –43.0% –


Latest Research Papers/Publications

• NZ Q3 Current Account Preview (16 December)

• NZ Weekly Forex Outlook (16 December)

• HYEFU Preview (15 December)

• NZ Q3 Terms of Trade (10 December)

• NZ Agribiz December 2008 (9 December)

• NZ Weekly Forex Outlook (8 December)

• RBNZ MPS Review (4 December)

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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