Monday August 3, 2009 - 19:48:41 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex Research - Morning Report
Morning Report Tuesday 4 August 2009
News and views
Markets last night offered firm clues regarding medium term direction, following last week's indecisive price action. A bid tone to risk was apparent during early London, but the consensus-beating US ISM factory report really sparked the bulls. The S&P500 opened strongly and held those gains for the session to be up 1.5% near the close, just above the psychological 1000 level, last seen in November. Earlier, China's PMI (CLSA) reportedly rose to a one year high in June. The usual correlations were restored last night, oil up 3.3% and copper +4.6%. US treasuries duly lost ground by 16bp from the previous day, the curve steepening by 8bp. Three month Libor shed another 0.7bp to 0.47%, and the TED spread fell to a two year low, indicating further decline in financial market stress.
The US dollar was under pressure from the Sydney close, and has clearly broken below 78.30 support. EUR staged a 2.5 cent rally from 1.4210, consolidating above the two-month old range as we write. GBP rose from 1.6700 to 1.6985, outperforming most other currencies. JPY underperformed the dollar on expectations of outward Japanese investment, from 94.60 to 95.35.
AUD moved off its 0.8350 Sydney closing level to reach 0.8440, a level last seen in September 2008.
NZD finally broke decisively above the key 0.66 level, reaching 0.6688 and currently consolidating above 0.6650 AUD/NZD slipped a little, hovering around the 1.2600 level.
US ISM factory jumps to 48.7 in July. The ISM factory survey posted its seventh consecutive (and at 4.1 pts, strongest this year) monthly gain, bettering our above consensus 47.0 July forecast, although at 48.9 that still represents a modest pace of industrial decline. Within the detail we see an encouraging rise in the production index and renewed strength in orders (which had turned positive in May but fell again in June). If it were just orders and output driving the composite, July would have shown a positive headline. Indeed back in, say, 2005, when the economy was in the fourth year of recovery from the 2001 recession, readings in the mid 50s for orders and production were the norm. However in recessionary 2009, the ongoing drag from jobs, while less in July than in June, remains a significant source of industrial sector weakness, as does inventory rundown, given the way the ISM defines overall activity in the sector.
US construction spending rose 0.3% in July, just beating our above consensus forecast for a 0.2% gain. As we expected, gains in housing (consistent with the recent upswing in starts) and public spending more than offset renewed but modest declines in the private non-residential component.
German retail sales fell sharply in June; May had been previously revised to a steep fall from a modest gain. So the German retail spending picture at the end of Q2 now looks very depressed.
UK PMI factory jumps from 47.0 to 50.8 in July. As with most factory PMIs from around the world, the UK index was stronger in July, for the fifth month running. What stands the UK apart, though, is that the July result shows the industrial sector is expanding once again. That, coupled with an already expanding services PMI (>50 in both May and June), suggests that the UK economic recession is now over. It remains to be seen whether Q3 GDP data (not due until late October) confirm that signal.
NZD has finally broken above the important 0.66 resistance level (which had held for two months), providing us with a bullish trade signal. Pullbacks from here should now be supported by 0.660, and the immediate target is 0.6700. Longer term, the case for a move towards 0.70 and beyond is building. Today's NZ wage data should confirm the absence of cost pressures, and across the Tasman, the RBA will be watched for follow through from Governor Stevens' recent hawkish speech. Australian retail sales will also be important.
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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