Wednesday June 19, 2013 - 21:34:59 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex - Westpac Morning Report
Morning Report Thursday 20 June 2013
Global market sentiment: Markets were significantly surprised by the Fedís outlook shift and elaboration on tapering prospects. The FOMC statement said downside risks to the US economic outlook had diminished , and in Q&A Bernanke said the Fed may start tapering QE later this year and end it mid-2014. Equities fell, while US interest rates and the US dollar rose significantly. The S&P500 is currently down 1.0%.
Interest rates: US 10yr treasury bond yields broke sharply higher following the FOMC, from 2.20% to 2.33% - a 14-month high. Australian 3yr government bonds yields followed suit, rising from 2.58% to 2.66%, while the 10yr yield rose from 3.47% to 3.58% - a three-month high.
Currencies: The US dollar index surged by 1.2% following the FOMC. EUR plunged from 1.3417 to 1.3262. USD/JPY rose from 95.00 to 96.94. AUD fell from 0.9557 to 0.9319, retesting last weekís multi-year low. NZD fell from 0.8050 to 0.7870. AUD/NZD retested last weekís multi-year low of 1.1820.
US FOMC decision hints at tapering, conditional on economy evolving in line with the Fedís forecasts. The statement itself noted that economic risks had diminished in the past three months, but said that asset purchases would continue at the previous pace of $85bn a month for now. However, Chairman Bernanke then said that asset purchases could start tapering in the second half of this year and end by mid-2014 - if the economic outlook evolves in line with the Fedís (marginally upgraded) forecasts. On this, weíd refer to the Fedís forecast record over the past few years: like the economics consensus, the Fed has repeatedly extrapolated turn of year strength in the jobs, survey and other activity data to year end and beyond. But the data slumped in mid 2010, 2011 and 2012 causing forecast misses (for GDP growth) of at least 1 ppt and prompting the Fed to embark on QE2, twist, QE3 and QE4. Over this four year period Westpac has correctly forecast year end growth not to materially exceed 2%. Our forecast for the end of 2013 is 1.9% for GDP (and 7.7% for unemployment) and if we are right and the Fed comes round to our view there will be no asset purchase tapering this year or well into next on the basis of sustained economic recovery.
Bank of England June minutes show 6:3 vote against further QE for the fifth month running with the outgoing Governor King in the minority again. Usefully, these minutes will provide a template against which to assess the apparent leanings of incoming Governor Carney when the July minutes are published.
Event risk today: Todayís calendar is busy with important releases. NZ has Q1 GDP, a major market mover with consensus today at 0.5% qoq. The RBA reports fx transactions. China has manufacturing PMI (HSBC version). The Eurozone has PMIís, and the US releases jobless claims, PMI, home sales and a regional survey.
NZD/USD 1 day: The Fedís tapering guidance today has boosted the US dollar and hurt the NZD. Resistance is now at 0.7950 for a move towards 0.9960 during the days ahead.
NZD/USD 1-3 month: We saw the first test of the critical 0.7800 support area last week. That test failed but we are watching for further attempts, any break below then targeting 0.7455. Fed tapering expectations will remain a depressant. Long speculative positioning has been unwound but NZís economic data momentum is likely to slow during the next few months, helping the bearish case.
AUD/USD 1 day: The Fedís tapering guidance today has boosted the US dollar and hurt the AUD. A sustained break below 0.9325 (being tested as we write) argues for a move towards 0.9220 next.
AUD/USD 1-3 month: The contracting range since July 2011 has broken down decisively, pointing towards 0.9200 during the next few months. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.
AUD/NZD 1 day: The 1.1820 level is key Ė any break below this argues for another multi-cent fall.
AUD/NZD 1-3 month: This consolidation period (which started on 29 May) will be complete with a break below 1.1820, the trend decline then resuming towards 1.1500. 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 US and Australian bond yields overnight (see above) it should open up 4bp at 3.12%.
NZ 2yr swap yield 1-3 month: A sustained break above 3.10% argues for 3.18% next. While the next few months could see rates swing either way, by late-2013 we would expect to see the 2yr closer to 3.40% based on NZís 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 20 June 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 Westpacís
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 outcomes may differ substantially from these forecasts.
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