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Sunday February 1, 2009 - 19:47:38 GMT
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Forex Research - Morning Report

Morning Report  Monday 2 February 2009


News and views

When US talks regarding the ‘bad bank’ concept hit snags on Friday (problems with valuation and inflexibility), risk retreated. US data was largely as expected, apart from a better GDP print, and the US dollar index gained around 1%. The S&P500 and Euro-Stoxx both ended down around 2%. Gold hedged the fall in risk, gaining 2%. Oil, took a contrarian path, up almost 1% on new production cuts announced by OPEC. A WSJ story said China had been selling US treasuries and other assets, which partly explains the 80bp rise in 10 year US treasury yields this year.


NZD’s move down hit a new 0.5050 low in Europe, as comments from RBNZ’s Bollard supported anticipation of further rate cuts, and poor building consents data played to the script of gloomy Q1 data releases. It is currently ranging between that low and 0.51.


AUD/USD fell from 0.6485 to 0.6350 during Europe’s session, after December’s private sector credit data were lower than expected, underpinning the chances of a 1% rate cut by the RBA on Tuesday. This saw the AUD/NZD cross slide to 1.25, after reaching 1.28 on Thursday.


EUR fell another cent on Friday, to 1.28, amid talk of bond-index funds reallocating, and softer unemployment and CPI data supporting the negative risk sentiment. Moody’s put Ireland on negative watch, joining Standard & Poor’s. GBP rallied 2.5 cents from 1.42, George Soros commenting that at 1.40, there was no compelling reason to stay short. JPY continued hovering between 89 and 90.


US Q4 GDP contracts 3.8% annualised. US GDP contracted at its fastest pace in almost twenty-nine years in Q4, although the –3.8% annualised outcome was not as weak as we or the market had expected. This was mainly due to an unexpected positive contribution from inventory accumulation which added 1.3 ppts to the GDP bottom line (we forecast a drag) and a further 0.1 ppts from net exports (where we also expected some drag). Also, consumer spending was not quite as weak as in Q3, whereas we had expected it would deteriorate a little further. On the other hand, business investment spending and housing both recorded even steeper falls than we were looking for.


The prices data in the GDP report were soft, with the overall deflator falling and core PCE positive but its lowest since the early 1960s! Similarly, the slumping labour market is feeding into slower growth in both wages and benefits, according to the employment cost index, up just 0.5% in Q4.


US private sector regional business survey results were not as neat as the Fed’s factory surveys for January (which all remained weak but less so than in December). Friday’s PMI results replicated that pattern in Milwaukee, but Chicago and New York were both weaker early this year compared to late 2008.


US consumer sentiment was revised lower in the final January UoM reading, with the current situation weaker than first reported but some offset from higher expectations. Sentiment in Jan at 61.2 remains higher than in Dec at 60.1 despite the latest downgrade.


Canadian GDP fell 0.7% in November, its third contraction in four months, setting up Q4 to be the weakest quarter of growth seen for some time (almost certainly steeper than Q1’s 0.8% quarterly annualised contraction).


The flash estimate of European inflation continued to collapse at the start of 2009, falling from its all-time high of 4.1% yr in July to its new all-time low of 1.1% yr just six months later. Also unemployment continued to rise, to 8% in Dec.


UK consumer confidence fell back quite sharply to a six month low in January. In Dec, consumer credit growth slowed sharply however mortgage lending did pick up off its lows.



We expect some consolidation today around 0.51, before another downward leg takes the NZD below 0.50. Today’s wage inflation numbers may weigh slightly, but the big mover will be unemployment on Thursday.


Events Today

Country Release Last Forecast

NZ Q4 Labour Cost Index Private Ord Time 1.1% 0.9%

Q4 QES Private Sector Ord Time 1.1% 0.9%

Aus Jan AiG PMI 33.7 –

Jan TD-MI Inflation Gauge –0.2% –

Q4 House Prices –1.8% –1.4%

US Dec Personal Income/Spending –0.2%/–0.6% –0.5%/–1.2%

Dec Core PCE Deflator 0.0% 0.0%

Jan ISM Manufacturing 32.9 33.2

Dec Construction Spending –0.6% –1.8%

Jpn Jan Vehicle Sales %yr –22.3% –

Eur Jan PMI Factory (F) 34.5a 34.5

UK Jan House Prices %yr –16.2% –18.4%

Jan PMI Factory 34.9 34.0


Latest Research Papers/Publications

• RBNZ OCR Review (29 January)

• NZ Weekly Forex Outlook (27 January)

• NZ Q4 labour market preview (26 January)

• NZ Economic Overview January 2009 (23 January)

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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