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Wednesday March 18, 2009 - 20:40:07 GMT
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Forex Research - Morning Report

 Morning Report Thursday 19 March 2009


News and views

US Fed to print money. This unexpected announcement from the FOMC meeting this morning, which will see the Fed purchase US$300b of US treasury bonds during the next 6 months, and pay for them with newly created money, sent a shock wave through currency and rates markets. US 10 year treasuries gapped higher, the yield down 50bp to 2.47%. The USD currency gapped down 2.2%, and gold put in a 5% rally after weakening during Europe's afternoon. US equities responded too, the S&P500 jumping 2.7% on the news. While the markets focused mainly on the Fed's planned treasuries' purchases, also of interest is the intended expansion of their balance sheet by around 60%. Around $750b of mortgage-backed securities will also be purchased, and the TALF's scope will be expanded to include distresses assets. The US Fed's move today is stimulatory for risk, and the global ripple effects may persist for several weeks.

Similarly to most risk-currencies, the NZD was subdued until the Fed announcement, ambling sideways around 0.53. The news sent it soaring to 0.5460, where it sits currently.

AUD ranged around 0.66 for most of the European session, the Fed-induced spike sending it to 0.68, with that level holding. AUD/NZD, which was looking toppish from 1.2545 before the news, fell a cent to 1.2410, but couldn't break that key support.

EUR had already rallied from around 1.30 to 1.31 on a short squeeze around noon Europe, FOMC pushing it to just under 1.35. USD/JPY fell from 98 to 95.65, and is consolidating above 96.

FOMC maintained rates at 0-0.25%, but eased monetary policy via additional credit/quantitative easing. The Fed has massively increased the credit easing programme by announcing its intention to purchase up to an additional $750 billion of mortgage-backed securities, bringing total purchases planned for this year to $1.25 trillion. They also plan to double purchases of agency debt to $200bn. Most important was the Fed's announcement that it intends to buy up $300bn of longer-term Treasury securities over the next six months - genuine quantitative easing or printing money. On the prospects for economic recovery, the committee expected "a gradual resumption of sustainable economic growth", significantly more downbeat than the previous statement which had pinned down the timing of recovery to the second half of 2009. On inflation, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term", a repeat from the last statement.

US CPI inflation was 0.4% in February. Higher petrol prices were the main driver of higher headline inflation, while food prices fell. Core inflation was stronger than expected at 0.2%, 1.8% yr

US Q4 current account deficit was -$133bn, a very sharp improvement over Q3 and the smallest deficit since March 2004.

UK Bank of England March MPC minutes showed unanimous decisions to cut 50bp and buy GBP75bn of assets. Concern that cutting rates too low could be counterproductive to the goal of expanding lending leads us to conclude that 0.50 is the BoE's desired terminal rate.

UK unemployment claimant count jumped 134k, the most since records began in 1971 and much weaker than markets expected. Jan was revised up from 74k to 94k. The claimant-count unemployment rate rose to 4.3% in Feb, up from 2.5% a year ago. Average earnings including bonuses over the Nov-Jan period were 1.8% higher than the same period a year earlier, a spectacular decline from the 3.1% growth recorded in the Oct-Dec period, considering the overlap of two months out of three. Average earnings excluding bonuses continued their 3.5% annual pace of growth.


We had been calling for the week-long corrective rally in NZD to extend to around 0.54 before running out of steam, and today we got that extension (although we admit to being as surprised as anyone on the catalyst). Whether it does exhaust itself here is questionable, though. Most likely, the global ripple effects of the Fed's move will continue to support NZD in the short-term, and we will watch for signs of a turning point before adopting a negative-NZD bias again. Today's suggested (and low-confidence) range is 0.54 to 0.55.



Upcoming Events

Date Country Release Last Forecast

19 Mar Aus Q1 WBC-ACCI Sur of Indust Trends 40.4 –

Feb New Vehicle Sales –1.1% –3.0%

Q4 Dwelling Commencements –11.1% –10%

Feb Merchandise Imports AUDbn 17.3 –

RBA Assistant Gov Edey Speaking

Mar RBA Bulletin

US Initial Jobless Claims w/e 14/3 654k 650k

Feb Leading Index 0.4% –0.6%

Mar Philadelphia Fed Index –41.3 –40.0

Jpn Jan All Industries Index %mth –2.3% –2.5%

UK Feb PSNCR £bn –25.1 4.5

Feb Money Supply M4 %yr 16.1% –

Mar CBI Industrial Trends Survey

Can Feb Consumer Price Index %yr 1.1% 1.0%

Feb CPI BoC Core %yr 1.9% 1.5%

20 Mar NZ Feb External Migration ann. 4,540 4,590

Feb Credit Card Transactions 1.7% –

Jpn Spring Equinox Day

Eur Jan Industrial Production –2.6% -4.2%

Ger Feb PPI %mth –1.2% 0.2%



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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