Wednesday July 1, 2009 - 21:06:46 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex Research - Morning Report
Morning Report 2 July 2009
News and views
US economic data last night had a mildly bearish tone overall - ADP payrolls were weaker than expected (although this series is acknowledged to be a poor indicator of the more important non-farm payrolls series), ISM manufacturing met consensus, and construction spending and pending home sales were weaker. The S&P500 opened 10 points higher, but lost ground from then on to close +0.4%. US 10yr treasuries are unchanged, although the front end of the curve is 6bp lower. NAB issued USD 2.75 billion 5yr government guaranteed bonds at swap + 50bp.
The US dollar followed equities' lead and weakened throughout the London session, losing around 0.7%. China popped up late in the day asking for the next G8 meeting to discuss the global reserve currency, to little effect. EUR posted a strong rally to 1.4200, a story on the magnitude of European banks' potential losses unable to dampen the move. GBP underperformed, initially gaining 1.5 cents to 1.6550, but slipping back to 1.6470.
AUD rebounded from its Sydney closing low of 0.8025 to 0.8108, but has slipped during the past few hours to 0.8080.
NZD was the underperformer of the evening, weighed by fears of large outflows from NZD Eurobonds in July, as well as another weak Fonterra milk powder auction (down 3% since last month). From the Sydney closing high of 0.6475, it fell to 0.6387 (the milk result was immediately worth around -30 pips), staged a small rally, and is back near the lows as we write. AUD/NZD is higher at 1.2630.
US ISM factory index up from 42.8 to 44.8 in June. The ISM factory survey posted its sixth consecutive monthly gain, just bettering our 44.5 June forecast, although at 44.8 that still represents a significant pace of industrial decline. Within the June detail we see an encouraging rise in the production index but renewed modest slippage in orders (which had turned positive in May).
US construction spending fell 0.9% in May, with weakness in housing and public spending more than offsetting unexpected strength in the private non-residential component, which if sustained may require us to tweak higher our forecast contribution from business investment to Q2 GDP growth. Also, pending sales of existing homes posted their fourth consecutive gain, up just 0.1% in May, but up 12.8% from their recent low-point in January. In contrast, completed existing home sales were up just 6.2% compared to the start of this year. This result suggests there is still some upward momentum (from very depressed levels) in the house sale data, even if it mainly driven by the distressed sales of foreclosed houses at knock-down prices.
ADP estimates that US private payrolls fell 473k in June, a marginal improvement on the revised 485k fall estimated for May. Now we know that in May ADP was significantly weaker than the official BLS payrolls report; if that were to continue in June, then payrolls might show an even smaller fall than in May. Or, ADP might be signalling that May's payrolls outcome overstated the improvement taking place in the labour market. We somewhat favour that latter scenario. Our forecast for total payrolls in June, out tomorrow Thursday July 2, is for a 400k fall.
German retail sales up 0.4% in May, their third consecutive monthly gain, enough to reverse most of the steep fall in sales at the start of the year, although the annual sales pace of -2.9% yr is still quite negative, partly a function of one less trading day in May this year.
UK factory PMI 47.0 in June. As with most factory PMIs from around the world, the UK index was stronger in June, for the fourth month running, implying a significantly slower pace of contraction in the industrial sector in Q2, compared to earlier this year.
Global sentiment towards NZD has deteriorated during the past two days, but as we pointed out earlier, tonight's US payrolls report is the week's major event risk. We expect a better than consensus outcome, which should at least support NZD for a day or two. Next week, though, risk aversion should start reasserting itself, with the seasonal Q3 volatility spike, US data poised to disappoint, US mortgage defaults likely to rise, and Chinese support for commodities likely to stall. Today, 0.6480 should cap domestic price action, with a risk of 0.6550 after tonight's payrolls report.
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. Â© 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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