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Thursday May 21, 2009 - 22:52:31 GMT
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Forex Research - Morning Report

Morning Report  Friday 22 May 2009


News and views

US jobs data disappointed investors, prompting a broad selloff in equities. The S&P500 plunged at the open, and remained weak to close down 1.7%. Chartists will point to Wednesday's key day reversal as the warning, and bears will note VIX jumped back over 30 (it appears 30 is the new 40, the psychological demarcation between optimism and pessimism). A significant jolt to US sentiment came from Standard and Poor's unexpected revision of the United Kingdom's sovereign (foreign currency) credit rating from AAA to AAA (negative outlook), citing the high government debt levels projected over the medium term. The announcement affected many asset classes in many countries, including US 10 year treasuries which sold off by 17bp. Credit default swaps for the UK, relative to Germany, were 5bp higher on the day. US 3mth Libor fell, as has been usual, but by a larger 5.5bp to 0.66%.

While negative events have benefited the USD in the cycle, expectations that the US could be in line for the ratings chopping block saw the dollar index weaken by 0.9%. This breakdown in correlations saw EUR jump higher to around 1.39 at midday NY, after spending the European session fixed at 1.38 (some countries on holiday). GBP fell from 1.5800 to 1.5515 around the Standard & Poor's news, but climbed back over the next 6 hours to 1.5890, a 6-month high. USD/JPY posted a 2-month low, at 94.

AUD was supported by USD weakness, the UK's rating producing a prolonged dip to 0.7670 before recovering to 0.7795. There was speculation the RBA may have sold AUD above 0.7800.  NZD dipped a cent on the rating, to 0.6015, but is back around 0.6100. AUD/NZD slipped to a lower 1.27 to 1.28 range. NZ interest rate swaps rates are 5bp higher this morning, following US and AU rates.

US Philly Fed posted virtually no headline improvement in May, rising 1.8pts to -22.6, indeed the new orders index was slightly weaker. Shipments and jobs, however, posted more significant gains, but even these readings are still consistent with sharply contracting activity.

US leading index posted its first monthly rise since June last year in April. Almost half of the 1.0% gain was due to the surging stock market; interest rates and consumer confidence explained most of the rest although lower initial jobless claims and the work-week also contributed. This is a positive signal although a turning point is not usually called until three consecutive positives are recorded.

US initial jobless claims fell 12k to 631k last week (the prior week was boosted by Chrysler related layoffs) but remained within the 605k to 674k range that has prevailed since the end of January. This is the payrolls survey week and with the 4 week claims average of 629k comparing to 648k in the same week in April, there are grounds for expecting a modestly smaller fall in non-farm payrolls in May compared to April.

Japanese tertiary activity index slumps 4%. The index, which tracks household and business spending on phone calls, power and transport, recorded its sharpest fall in 12yrs, well below expectations of a 1.5% decline. Coming on the heels of the horror 15.2% annualised rate of contraction in Q1 GDP, the result underscores how the export-led slump is now permeating throughout the domestic economy.

Euroland advance PMIs showed a further improvement in May, still consistent with declining economic activity in the second quarter, but not as drastically weak as Q1's 2.5% GDP contraction.

UK business investment fell 5.5% in Q1, limiting the scope for an upward revision to Q1 GDP growth. Also UK retail sales volumes posted back to back rises in March and April in the newly revamped retail sales series. The April gain of 0.9% was close to our 0.8% forecast and reflected temporary factors such as the timing of Easter and the relatively hot weather last month

Standard & Poor's revised its outlook on the UK's AAA credit rating from stable to negative, coinciding with the publication of April public borrowing data which revealed further deterioration in the UK's public finances. Recall that earlier this year, Spain and then Ireland lost their AAA S&P ratings.


Monday is a London and NY market holiday, so we expect volatility tonight from heightened position squaring. Given positions are likely long risk currencies, any squaring should produce a selloff in NZD during the next 24 hours. Adding to the negativity, extrapolations of the UK's rating onto NZ, given the budget next Thursday, are possible. The 0.6130 level is still important resistance, though, and should that be exceeded for whatever reason, NZD would go much higher.


Upcoming Events

Date Country Release Last Forecast

22 May US Fedspeak: Bernanke

Jpn Bank of Japan Meeting 0.10% 0.10%

UK Q1 GDP Revision –1.9% –1.8%

Can Mar Retail Sales 0.2% 0.5%

25 May US Memorial Day

Jpn BoJ Monthly Report

Mar All Industry Activity Index –2.0% –

Ger May Ifo Business Climate 83.7 84.9

UK Late May Bank Holiday

26 May NZ Apr Merchandise Trade NZDm 324 450

Q2 RBNZ Inflation Expectations 2.3% 2.1%


Latest Research Papers/Publications

• NZ Budget 2009 Preview (21 May)

• NZ Weekly Forex Outlook (18 May)

• NZ Q1 Retail Sales Review (15 May)

• NZ Weekly Forex Outlook (11 May)

• NZ Q1 HLFS Review (7 May)

• NZ Weekly Forex Outlook (4 May)

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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