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Tuesday November 20, 2007 - 20:44:41 GMT
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FX Research - Westpac Institutional Bank - Morning Report

Morning Report  Wednesday 21 November 2007

New Zealand dollar
NZD firms overnight.
Having failed to recover from recent losses yesterday the NZD soon fell away, with the continued hangover of risk aversion dictating the currency’s direction in early trading. This saw the currency trade briefly to 0.7500 where small exporter demand ensured a prompt rebound. Asian equity market strength in the afternoon session saw the AUD strengthen, dragging the NZD higher, but with sentiment cautiously bearish the NZD failed to make any headway above 0.7550. The markets ignored data which showed that net immigration remained low in Oct, with the net inflow of 1,700 people being the weakest Oct since 2000. It was a different story overnight however, with broadbased USD weakness and stable global stock markets combining to pushing the NZD higher. After having traded as high as 0.7635 the NZD has fallen back but still opens stronger this morning around 0.7600.

Australian dollar
AUD back in favour.
The 0.8750 support level in the AUD held firm yesterday as the currency quietly drifted higher over the course of the day recovering from its recently risk aversion inspired sell-off. Buying was stronger in the afternoon on the back of a recovery in Asian equity markets, which in turn had been unable to maintain earlier selling pressure. The AUD continued to rally strongly overnight, also inspired by broad-based USD weakness, and opens today around 0.8860.

Major currencies
USD falls further as sentiment worsens.
It seems the market finds a new reason to sell the USD every day. Tuesday’s theme was rumours that Middle East oil nexporters may revise their peg to the USD to fight inflation. Further speculation about rate cuts in the US and concerns about the depth of subprime exposure in the US has

forced the USD to all time lows against the euro and Swiss franc. Growth forecasts for 2008 from the Fed minutes were very wide at 1.8% to 2.5% clearly leaving room for a lower number. The euro reached a record high at 1.4815 after trading at 1.4640 earlier in the day. The USD strengthened against the yen early on from 109.70 to 110.55 but gave up the gains to close back at 109.70. Sterling grinded higher, steadily rallying from 2.0460 to 2.0675 this morning.

Economic data and events
US FOMC minutes, Oct 31 meeting. The minutes to the Oct 30-31 FOMC meeting revealed that “many members noted that this policy decision (the 25bp rate cut) was a close call”, although only one (Hoenig, Kansas City Fed) actually dissented. There was widespread acknowledgement that markets were still “fragile” and “concern that an adverse shock – such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses – could further dent investor confidence and significantly increase the downside risks to the economy”. One could argue that in the three weeks since the meeting, that risk has, to some extent, been realised. Also, all 17 individual FOMC members’ forecasts for growth and inflation were published for the first time. They are too numerous to publish in detail here, but the “median range” for GDP growth in 2008 was 1.8-2.5%, compared to 2.5-2.75% predicted in July. Core inflation forecasts were edged down a little to 1.7-1.9% (from 1.75-2.0%). Headline inflation forecasts were published for the first time: 2.9-3.0% for 2007, and 1-8-2.1% for 2008 (PCE deflator).

US housing starts up 3% in Oct, but... Housing starts modestly bettered our 2% forecast rise which, on the surface, adds to the recent data pointing to a possible “bottoming out” in the housing sector in Q4. But the detail in the report was not pretty. Single family starts and permits both fell very sharply; but in the case of starts this was masked in the headlines by a 44% jump in the volatile apartment building component (reversing a 36% plunge in Sep).

German producer prices up 1.7% yr in Oct. The PPI annual rate is now clearly bottoming out, with food and energy price pressures in particular tending to offset the deflationary impact of the rising euro.

UK factory sector upside surprise. The CBI factory survey bounced back somewhat in Nov, showing stronger orders, exports and prices, but (further) slippage in the output measure. However money supply, mortgage lending and budget deficit data were all indicative of a slowing economy in Q4.

Canadian CPI 2.4% yr (core 1.8% yr) in Oct. Headline inflation unexpectedly fell last month, and the core rate eased more than we expected. Outside of shelter, the CPI breakdown was mostly soft, indicative in many cases of C$ strength offsetting other price pressures. With core inflation back below the 1-3% target mid-point quicker than the Bank of Canada expected, and BoC Governor Dodge openly mulling the possibility of rate cuts at the weekend, policy easing in the not to distant future is clearly an option on the table.

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (19 November)
• Outlook for
New Zealand house prices (15 November)
• NZ Q3 Retail Sales Review (15 November)
• NZ Weekly Forex Outlook (12 November)
• NZ Q3 HLFS Review (8 November)
• Climate change to put heat on RBNZ (7 November)

These papers/publications are available on Online Research on
Westpac Institutional Bank’s website (

Events Today

Country Release Last Forecast

NZ Oct Electronic Card Transactions 1.0% n/f
Oct Credit Card Transactions 3.1% n/f
Aus Sep Westpac–MI Leading Index 5.6% n/f
Oct New Motor Vehicle Sales 1.8% 3.5%

US Initial Jobless Claims w/e 17/11 339k 330k
UoM Consumer Sentiment (F) 75.0 74.0
Oct Leading Index 0.3% –0.4%
Jpn Oct Trade Balance ¥bn 1034 1079
Sep All–Industry Index 1.0% –1.5%

UK Nov BoE Policy Meeting Minutes 8:1 8:1
Can Sep Retail Sales 0.7% 0.1%

renciesAustralian Dollarealand Doll

Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 14 November 2007. 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 regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 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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