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Tuesday May 28, 2013 - 20:00:41 GMT
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Forex - Westpac Morning Report

Morning Report Wednesday 29 May 2013


Market wrap
Global market sentiment: Stronger US economic data boosted sentiment. Consumer confidence and house prices both surprised to the upside, pushing the S&P500 o a 3-day high, although it fell 1.2% later on to be currently up 0.4% on the day. Prior to that, Asian and European equity markets were mostly 1% to 2% higher. The CRB commodities index is up 0.4%, although iron ore is down 2.6% (for a total of -26% since mid-March).

Interest rates: US 10yr treasury bond yields rose from 2.03% to 2.14% - a 2-month high - following the US data. A 2yr auction was disappointing, awarded at 0.5bp above market and with a bid-cover ratio of 3.0 (vs 3.7 12mth average). Australian 3yr government bond futures rose from 2.61% to 2.66%, while the 10yr rose from 3.33% to 3.40%.

Currencies: The US dollar index rose following the US data. EUR initially rose from 1.2900 to 1.2950 but then slumped to 1.2853 following the US data. AUD similarly rose from 0.9640 to 0.9696 before reversing to 0.9622. NZD rose to 0.8127 before falling to 0.8075. AUD/NZD ranged between 1.1890 and 1.1940.

Economic wrap
US consumer confidence improved to 76.2 in May from 69.0 previously. The increase was well above market consensus (71.2) and was from an upwardly revised April print (from 68.1). Both present situation (66.7 from 61.0) and expectations (82.4 from 74.3) posted strong gains with strong equity market performance and a rebound from the uncertainty around the fiscal cliff earlier this year lifting confidence to post-recession highs. Within the breakdown there were also modest improvements in the labour market components.

S&P Case Shiller house prices rose 1.1% in March, a little ahead of consensus, with the annual rate moving back into positive double digits at 10.9%, the highest rate since mid-2006. The increase was broad based with all 20 of the areas seeing gains. Low mortgage rates, an improvement in demand and a rundown of inventories all continue to support the recovery in the housing market.

Richmond Fed and Dallas Fed manufacturing surveys also both posted increases. Richmond Fed survey rose for only the second month in six from -6 to -2 while the Dallas survey moved up to -10.5 from -15.6.

Market outlooks
Event risk today: In NZ, the release of Fonterra’s milk payout forecast for 2013/14 holds risks for AUD/NZD. Australia’s Q1 construction work is a market-mover, the leading index not so. There’s also German unemployment tonight.

NZD/USD 1 day: A brief bounce above 0.8125 is likely if Fonterra’s milk payout is a positive surprise.
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: 0.9600 below is vulnerable today.
AUD/USD 1-3 month: The contracting range since July 2011 is in the process of breaking down, a break below 0.9600 pointing to much lower thereafter. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.
AUD/NZD 1 day: 1.1895 below is vulnerable today.
AUD/NZD 1-3 month: The trend decline towards 1.1800 appears to have resumed. 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 3bp at 2.97%.
NZ 2yr swap yield 1-3 month: The 2.70%-2.80% area could yet be revisited Fed QE reduction fears subside. Late-2013, though, we expect a 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 29 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 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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