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Tuesday February 26, 2013 - 19:32:52 GMT
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Forex - Westpac Morning Report

Morning Report Wednesday 27 February 2013


Market wrap
Global market sentiment: Risk sentiment was capped by the Italian election result and looming US spending cuts. The stalemate outcome in Italy may not be resolved for some time, the political uncertainty likely to prompt bond yields even higher. Fed Chairman Bernanke’s testimony was dovish overall but did allude to the costs of maintaining quantitative easing as well reminding the market the 1 March government spending cuts are expected to dent GDP growth by 0.6% per year. The Eurostoxx 50 closed 3.1% lower while the S&P500 consolidated recent losses and is up 0.4% currently, strong US data overnight helping.

Interest rates: US 10yr treasury yields initially extended the recent decline to 1.84% - a one-month low – and then ranged between that and 1.89%. A 5yr auction was an average affair despite Bernanke’s bond-friendly testimony (QE will be sustained for now) with a bid-cover ratio of 2.9 (vs 2.9 average). Eurozone peripheral yields soared after the Italian result, Italy’s 10yr gapping 44bp to a 2 ½ month high and Spain’s 10yr up 42bp. Australian 3yr bond yields ranged between 2.71% and 2.76%, sustaining the break of a five-month old trend.

Currencies: The US dollar index (DXY) consolidated February’s 3.8% gain. EUR slipped slightly further to 1.3018 before settling between 1.3038 and 1.3122. USD/JPY consolidated yesterday’s plunge in a wide 91.13-92.40 range. AUD ground lower to 1.0201 (a four-month low), falling ½ cent after Bernanke started speaking. Underperformer NZD exaggerated the AUD move, falling from 0.8320 to 0.8224. AUD/NZD rose from 1.2320 to 1.2420.

Economic wrap                                           
Fed chairman Ben Bernanke went over familiar ground in testimony accompanying the Fed’s Semiannual Monetary Policy Report to Congress. He ran through the benefits and costs of using alternative policy tools, and explained the most recent FOMC statement in more detail. He also spent some time urging Congress and the White House to replace front-loaded spending cuts with more gradual fiscal consolidation.

US house sales and prices update. The S&P Case Shiller 20 city index rose 0.9% in Dec, its eleventh straight gain (the FHFA index also rose 0.6%). Annual house price inflation of 6.8% yr is the highest since 2006, and consistent with recent data showing the available supply of saleable homes at its tightest since the peak of the boom nearly a decade ago. Meanwhile, sales of new homes surged 15.6% in Jan, to be up 60% from the sales low point in Feb 2011, but still only recovering 15% of the slump between 2005 and 2011.

US consumer confidence jumped from 58.4 to 69.6 in Feb, recovering more than half of its slide form the post recession high of 73.1 in Oct last year. The present index rose 7.1 pts, lifted in part by improved assessment of the labour market, while expectations jumped 13.9 pts. US Richmond Fed factory index rose from –12 to 6 in Feb, recovering all of January’s 17 pt slump. Shipments and jobs rose, but orders were just flat after falling sharply last month.

The Italian election result: some thoughts. Italy looks to be ungovernable now so political uncertainty might not be resolved until fresh elections in May. Markets are worried once again that other eurozone members could follow suit, causing slippage in fiscal reform and renewed spikes in bond yields. The ECB OMT program would not be triggered in this situation because that requires strict fiscal conditions be adhered to; sovereign default risk is consequently higher. The election result also once again raises the spectre of an anti euro party in a member country increasing the risk of euro break up. If confidence collapses again the euro zone may not recover later this year – essentially Westpac’s base case scenario for 2013/2014.

Event risk today: NZ’s migration and trade balance releases are occasional market movers. Australia has Q4 construction work. ECB LTRO2 repayments will also be worth watching tonight.

NZD/USD 1 day: The critical 0.8315 multi-month trend support level was broken last night and should now provide resistance for any corrective bounce today. We expect sub-0.8220 this week.
NZD/USD 1-3 month: The positive trend since May was broken last night and if sustained today targets around 0.8100 initially during the month ahead. Our view of a fresh high later in 2013 remains intact though.
NZ 2yr swap yield 1 day: Opening today down 3bp at 2.90%.
NZ 2yr swap yield 1-3 month: Following this correction, which should extend to the 2.80%-2.90% area, a rise above 3.20% should ensue.
AUD/USD 1 day: The critical 1.0225 support level was broken last night, paving the way to 1.0150 next.
AUD/USD 1-3 month: Remains inside an 18-month consolidation triangle, which should see it reach 1.0150 before an eventual break above 1.0600.





Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 27 February 2013. 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 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. © 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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