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Thursday April 4, 2013 - 19:16:32 GMT
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Forex - Westpac Morning Report

Morning Report Thursday 5 April 2013


Market wrap
Global market sentiment: Equity markets were mixed today as the optimism at the open following the BoJ announcement soon gave way to concern over the deteriorating outlook in the Eurozone and downbeat comments by ECB President Draghi. Although there were slightly better than expected outturns for the Spanish and Italian services PMI (albeit still at very low levels), downward revisions to Germany (50.9 from 51.6) and France (41.3 from 41.9) were most concern as evidence that weakness in Eurozone activity is now being felt prominently in the core and not just the periphery comes through. This was compounded by a large rise in jobless claims in the US although seasonal factors due to Spring break and the Easter holiday are likely to have played a part. There was disappointment following the ECB policy meeting where markets had built up a small expectation of a rate cut or further targeted easing measures, neither of which were delivered. Draghi was suitably downbeat in his comments, however, to suggest some sort of policy move in the next couple of meetings. There was little fanfare around the BoE meeting which heralded no surprises and no changes. The Eurostoxx closed down 0.7% at 2621 and the FTSE 100 down -1.2% at 6344. In the US, after an initially rally, S%P 500 and Dow have both drifted back to give up all of their earlier gains and are now flat on the day.

Interest rates: The new programme by the BoJ saw JGBs the today with 10yrs ending their session 12bp lower. In the US, the 10y yield is currently at 1.77% (-4bp) having clearly broken below the 100dma with the 200dma (1.73%) now firmly in sight. In Europe, Bunds moved in line with the US closing at 1.24% but it was France that outperformed following the poor PMIs but also helped along by a succesful bond auction. A total of just under EUR7bn of bonds maturing in 2020, 2021 and 2022 were sold and relatively well received, Spain also held an auction of 3yr, 5yr and 8yr government bonds and managed to sell EUR4.3bn, just over the planned amount. Italian debt also rallied following comments from Mayor of Florence Matteo Renzi challenging Party Leader Bersani. Renzi is seen as having the potential to win a clear majority should he be party leader in fresh elections. 3yr AU bond futures are 3 ticks higher with 10yrs up 4.

Currencies: Focus was very much on the JPY with USD/JPY the clear underperformer up 3.2% to 96.13 but having touched a high of 96.47. AUD/JPY broke through resistance at 100 reaching 100.34 before consolidating back down at the figure. The US dollar index started the day higher following JPY weakness but on net is little changed on the day despite some volatility during the ECB press conference, drifting back lower late in the day to 83.0. Despite the rally overnight and a strong performance versus the JPY, the AUD is lower versus the USD at 1.04 while NZD/USD spent most of the afternoon oscillating around 0.8380 leaving AUD/NZD at 1.241.

Economic wrap
US initial jobless claims jump 28k to 385k in the week coinciding with the Easter and Spring Break holidays, so the highest reading for the year so far might be more to do with seasonal adjustment issues than underlying job market deterioration. Meanwhile, Challenger reported that corporate layoff announcements were up 30% yr in March.

ECB on hold at 0.75%. But ECB chief Draghi was clearly cogniscant of crystallising risks across much of Europe. He emphasised downside risks to the outlook from the outset in his introductory statement, which included “even weaker” than expected demand, said the Council was “monitoring closely” the situation and policy settings were appropriate “for the time being” although a rate cut was discussed extensively. We assess Draghi is signalling an upcoming policy announcement. It may not be limited to a rate cut; the Council is looking at nonstandard measures again. Given that fragmentation has impaired the transmission of monetary policy and tightened credit to small/medium businesses in the periphery, maybe the ECB is considering buying collateralised loans to this sector, for example.

Euroland PMI services revised down from 46.5 to 46.4 in Mar, with both the German and French indices revised down, the former now at 50.9, the latter at 41.3, just 1.1 pts above the low point during the deep recession of 2008/09. The French economy is almost certainly in recession again, for the second time since the start of last year. The composite PMI for Euroland was unrevised at 46.5 thanks to the upward revision to the factory index earlier this week. In other news, the PPI eased to a new cycle low of 1.3% yr in Feb.

Bank of England on hold at 0.50%, asset purchase program maintained at £375bn. The first policy meeting under the tweaked inflation mandate, but nothing to report.

UK PMI services rose from 51.8 to 52.4 in Mar, its highest since Aug last year and contrasting with the sub 50 readings for construction and factory PMIs.

Event risk today: The AU and NZ calendars are quiet except for an A$600m 2018 government bond tender in AU. Later, the monthly US jobs report will take focus and drive price action in the US session.

NZD/USD 1 day: The break below 0.84 suggests a move down to 0.8320 (100dma) is possible with 0.8480 resistance.
NZD/USD 1-3 month: A sustained rise above 0.8355 would put the NZD back into positive-trend mode, below suggests further weakness to 0.8100. Global surprises will drive it in the near-term but we expect a fresh high by late 2013 on NZ’s improving economy.
NZ 2yr swap yield: Looking to open at 2.88%.
NZ 2yr swap yield 1-3 month: Following the current consolidation, which could yet extend lower to 2.80%, a rise above 3.20% should ensue.
AUD/USD 1 day: Longer-term resistance of 1.05 now in sight.
AUD/USD 1-3 month: Remains inside an 18-month consolidation triangle defined by 1.0500 above and 0.9900 below. We expect the eventual break to be upwards.





Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 5 April 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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