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USD rally comes to a halt after FOMC minutes

Wed, Oct 10 2007, 06:22 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

New Zealand dollar

NZIER survey show economy remains stretched. The paring of expectations of a further cut in US interest rates this month following Friday’s US payroll report has seen the USD broadly appreciate over recent sessions. With this, the NZD has shied from seven week highs of 0.7675 and slipped to a local session low of 0.7606 yesterday. The NZIER survey of business optimism, released yesterday, was mildly supportive however, showing that capacity utilisation and labour markets remain tight. In overnight trade, the currency rebounded from an early low of 0.7586, rallying as high as 0.7633 and has extended these gains to 0.7640 on the open this morning.

Australian dollar

AUD strengthens as USD rally fades overnight. A firmer greenback also saw the AUD trade lower during the local session, yesterday. With lower gold and commodity prices also pressuring the currency, the AUD dipped to an intra-low of 0.8918 following the release of NAB business conditions index, which reported a moderation in September. From an early offshore low of 0.8912, the currency has strengthened during the overnight session to post a high of 0.8988, once again in sight of 23 year highs seen on Monday.

Major currencies

USD rally comes to a halt after FOMC minutes. The market was fairly quiet ahead of the FOMC minutes with most currencies contained to tight ranges. The euro did manage to garner support from comments by ECB Chief Trichet concerned about keeping a lid on inflation. This helped the currency climb of recent multi-week lows. GBP saw a similar intra-day bounce from a low of 2.0257 as traders scaled back dollar exposure ahead of the key report. The minutes revealed no surprises however there was a heavy focus on downside growth risks and the improved inflation picture which the market interpreted as being slightly more dovish than hawkish. As a result both the euro and GBP rallied whilst USD/JPY retreated a touch.

Economic data and events

US FOMC minutes from the meeting of Sep 18 revealed that although the US economy had proved robust to financial turmoil in the past, it was judged that “credit markets were likely to restrain economic growth in the period ahead”. The housing market was noted to be “exceptionally weak” and that “further slowing of employment growth was likely”. The minutes stated that “all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action”, and that “the easing of policy seemed unlikely to affect adversely the outlook for inflation”. Nonetheless, “all agreed that some inflation risks remained” and “future actions would depend on how economic prospects were affected by evolving market developments and by other factors”.

US Oct IBD/TIPP economic optimism fell to 47.3 from 48.2, a bit weaker than the market expected.

US Fedspeak: Poole said that jobs data did not confirm that downside risks are eventuating, and that financial markets appear to be stabilising, if still remaining fragile. However, he also said that the housing market may stay weak for some time.

Ger Aug industrial production climbed 1.7%mth (s.a.), much stronger than expected. Annual growth of 5.2% is made up of a 6.2% increase in manufacturing, and a -3.2% fall in construction.

UK Aug visible trade deficit narrowed to -£6.85bn from a revised £7.4bn in July. This result was in line with market expectations. Goods exports rose 0.5%mth, while import growth slowed by -1.8%mth.

UK Sep BRC Retail Sales Monitor rose to 3.0%yr from 1.8%yr in Sep. The data suggest relatively robust consumption looking forward.

Can Sep housing starts leaped 19.8% in Sep, much stronger than the market was expecting. All of the growth was in the volatile multi-unit category, however, with single family starts falling 4.3%.

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Published on  Wed, Oct 10 2007, 06:24 GMT