Tuesday October 5, 2010 - 19:17:13 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex Research - Morning Report (Westpac)
Morning Report Wednesday 6 October 2010
News and views
Bullish sentiment stormed back to life overnight aided by the Bank of Japan's earlier decision to implement new stimulus measures and stronger than expected US PMI data. The S&P500 broke out of its recent range to the upside following an unexpected rise in the US ISM non-manufacturing report and stands up 1.8% at 1158, through the key 1150 level. Gold stormed through $1330/oz making a new record high of $1338/oz while oil (+1.4%) and copper (1.8%) also rallied strongly. NZD/USD broke to fresh 2010 highs, EUR/USD tested 8 month highs while AUD/USD recouped all its earlier losses (more than US1 cent) associated with the RBA's earlier decision to maintain steady policy.
European markets awoke to the bullish news that the Bank of Japan announced aggressive moves to pull the nation out of its deflationary spiral - cutting their policy rates to a 0.0%-0.1% range from 0.1%, embarking on a $60bn asset purchase program and pledging to keep rates at zero until medium and long-term price stability was in sight. Markets also took comfort from a stronger than expected ISM services survey at 53.2 in Sep vs 51.1 last month and consensus at 52.0. This reflected a 2.5 pt rise in new orders and a 2 pt rise in the jobs index. The headline index was still the second lowest since Feb but softens the steepness of the downtrend in this index since it peaked at 55.4 in March-May.
The DXY index sold off steadily throughout offshore dealings, falling 0.6% and breaching 78.0 to lows of 77.7. The euro outperformed reaching a high of 1.3851 (+1.2%). USD/JPY probed below 83.0 for the first time since the BoJ intervened during mid-September.
NZD/USD rose 1.2% overnight to session highs just above 0.7490. After weakness early on following the unexpected pause by the RBA, AUD/USD ran into demand at 0.9540 and subsequently rallied back in line with equities back to 0.9700. AUD/NZD broke sharply lower however declining to 1.2950 while NZD/USD benefited rallying to 0.7488 - its highest level since November 2009.
US non-factory ISM composite rises from 51.5 to 53.2 in Sep. This reflected a 1.6 pt lower reading on business activity, a 2.5 pt rise in new orders and a 2 pt rise in the jobs index. The Sep headline was still the second lowest since February, but softens the steepness of the downtrend in this index since it peaked at 55.4 in March-May.
The Bank of Japan has announced what it calls "Comprehensive Monetary Easing". The Bank has announced a JPY5 trillion asset purchase program. In addition, the Bank has installed what might be mistaken for an inflation target, committing to maintain ZIRP until the CPI is exhibiting "medium to long term financial stability", which is described as +2%y/y or lower (buttressed by the midpoint of Board members "understanding of the topic at 1%). Eligible asset classes for the purchasing program are quite broad, as they should be. The Bank nominates JGBs, CP, corporate bonds, ETFs and J-REITs. This is an exciting day: the only issue here is that JPY5 trillion is not that big. The lending program is capped at JPY30 trillion and the previous editions of QE saw the current deposits portion of the balance sheet expand to JPY35 trillion. Our suspicion is that this target will be increased in JPY5 trillion increments as time goes by and inflation is not returning.
Euroland retail sales fell 0.4% in Aug. That is the first fall in four months, and pulled annual growth back to 0.6% yr, it lowest since April. Also, the final services PMI was revised up from 53.6 to 54.1, still leaving in pace 1.8 pts of slippage from 55.9 in Aug, its steepest one month pull-back yet since the current uptrend began in March last year.
UK PMI services up from 51.3 to 52.8 in Sep. That is still the weakest reading since June last year, and leaves in pace a downtrend which began in Q2 this year.
AUD/USD and NZD/USD outlook next 24 hours: The AU and NZ calendars are thin today. Both AUD and NZD start local trading within a whisker of their highs. The NZD looks set to test the October 2009 highs of 0.7635. AUD is on course to test its recent 0.9750 highs.
.Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 13 August 2010. 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 Westpacâ€™s
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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 registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. Â© 2010 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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