Wednesday May 22, 2013 - 20:36:41 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex - Qestpac Morning Report
Morning Report Thursday 23 May 2013
Global market sentiment: Sentiment was damaged by the Fed Chairman’s speech. The eagerly awaited testimony from Bernanke was quite dovish, warning against premature tightening, initially encouraging a spike in equities and other risky assets. However during Q&A later he said the Fed “could reduce purchases in the next few meetings if the data supports it”. Despite the qualification, markets (which are positioned for continuing dovish policy) were spooked. The S&P500 initially made a fresh record high but then plunged 2.3% to be down 1.1% overall.
Interest rates: US 10yr treasury yields initially dipped from 1.94% to 1.89% after Bernanke’s text was released, but then surged 16bp to 2.04% after the Q&A remark (above). 10yr treasury futures volume was the highest since 2007, indicating the panicky nature of the selling.
Australian government bonds outperformed their US counterparts. The 3yr yield rose from 2.56% to 2.65% while the 10yr rose from 3.22% to 3.36% - a one-month high.
Currencies: The US dollar index was volatile but ended up at a three-year high. EUR initially rose from 1.2900 to 1.2998 but plunged to 1.2834 after Bernanke’s remark. USD/JPY rose from 102.60 to 103.74 – a five-year high. AUD initially spiked to 0.9826 but then fell to 0.9662 – a one-year low. NZD spiked to 0.8205 and then fell to 0.8058 – an eight-month low. AUD/NZD was relatively stable between 1.1965 and 1.2020.
Fed Chairman Bernanke’s testimony to the Congressional Joint Economic Committee was a game of two halves – the scripted part of his testimony was fairly dovish, noting that the US labour market remains weak. However, later in the Q&A, he said that the Fed could start reducing asset purchases ‘in the next few meetings, if the economic data support it’. This could be deliberate ambiguity, or a reflection of the Fed’s own uncertainty – either way, it means markets will be watching US economic data like a hawk over the next few months. The May FOMC minutes showed a number of members supporting tapering QE as early as June if the data warranted, but disagreement on the evidence needed – and ‘many’ also still wanting to hold off until there is more progress on the US labour market.
US existing home sales grew 0.6%, less than expected, to slightly above the most recent high in November. A 1.2% rise in single-family sales drove the increase, while multiples fell. Existing home sales are slowly grinding upward but remain well below the 5.440m cycle high in late 2009 when sales were boosted by the homebuyers’ tax credit.
Event risk today: Locally there are expectation surveys from Australia for inflation and unemployment – minor for markets. More importantly there’s China PMI (HSBC version) this afternoon, while tonight there’s a batch of US data and Fedspeak. US data will assume even more importance for markets in the wake of Bernanke’s remark last night.
NZD/USD 1 day: We expect further fallout from the Bernanke remark, NZD to break below 0.8060.
NZD/USD 1-3 month: The uptrend since June 2012 has been broken and a decline towards 0.7800 is looking increasingly likely. Local fundamentals remain supportive but extreme long speculative positioning warns of a cleanout.
AUD/USD 1 day: We expect further fallout from the Bernanke remark, AUD to break below 0.9660.
AUD/USD 1-3 month: The contracting range since July 2011 is in the process of breaking down, 0.9600 the next major target. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.
AUD/NZD 1 day: Still correcting April-May’s large decline, and targets 1.2050 near term.
AUD/NZD 1-3 month: The trend decline to sub-1.1960 should resume once this corrective bounce is complete. Relative fundamentals (e.g. RBA easing to 2.0% vs RBNZ stuck at 2.5%) favour the NZD medium term.
NZ 2yr swap yield 1 day: Taking the lead from Australian bond yields overnight (see above) it should open up at least 3bp at 2.92%.
NZ 2yr swap yield 1-3 month: The 2.70%-2.80% area could yet be revisited once the smoke clears from the Bernanke remark. As long as that area holds though, we expect a late-2013 rise above 3.20% based on NZ’s improving fundamentals and eventual RBNZ tightening in 2014.
Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 23 May 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 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 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 outcom
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