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USD recovers as ADIA takes $7.5b stake in Citibank

Wed, Nov 28 2007, 06:14 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank  |  View company's profile

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New Zealand dollar

A day of two halves. The NZD opened around 0.7550 and was sold down to 0.7490 in early morning trade in tandem with a weaker Dow Jones Index. Plenty of demand at this level propped the currency up and it quickly rebounded through 0.7500 to spend the rest of the day in a 0.7510 to 0.7530 range. A RBNZ survey showing inflation expectations rose in Q4 had little impact. In late afternoon trade however the landscape was dramatically changed with the NZD jumping up one cent on news that the Abu Dhabi Investment Authority had agreed to buy a $7.5bn stake in Citigroup, which was seen as a signal to take on risk again. Overnight the NZD retreated back to 0.7533 as global equity markets softened then climbed again to 0.7580 in line with a stronger Dow Jones Index.

Australian dollar

Citigroup news buoys equities and carry. The AUD started the day under pressure with another test of the 0.8660/70 support level. It held in there again and by mid morning had recovered back through 0.8700. From there the currency nudged a little higher but found the going tough above 0.8720. Then the news broke that Abu Dhabi Investment Authority (ADIA) would invest $7.5bn in Citigroup, taking a 4.9% stake in the company. Equity markets around the region rallied hard on this news, with the Hang Seng at one stage rebounding around 3% on the back of this news. This prompted a carry trade rebound with USD/JPY pushing higher and AUD and NZD rising by over 1%. Overnight the AUD tracked US equity movements with an initial drift south as equity futures were sold, then a recovery to 0.8750 as the Dow Jones Index rallied over 1%.

Major currencies

USD recovers as ADIA takes $7.5b stake in Citibank. From a low of 107.29, its lowest level in more than two years, USD/JPY strengthened yesterday following news that the Abu Dhabi Investment Authority has agreed to take a $7.5bn stake in Citibank. The willingness of a Gulf state to buy into the troubled US bank gave a boost to equity markets, with the Dow Jones erasing much of the previous day’s losses. A better-than-expected German Ifo index release and the highest German CPI reading in 13 years saw the euro trade as high as 1.4909, before comments from ECB Council member Nicholas Garganas that recent moves in the euro had been “sharp and abrupt” and “undesirable” saw the currency pull back to 1.4830.

Economic data and events

US business surveys mixed. The Richmond Fed factory index recovered some of its steep October loss in November, but its services index gave up about half of its October bounce this month. Richmond’s retailing component showed renewed weakness.
US consumer confidence falls to 87.3 in Nov, its fourth consecutive (and steepest) decline. In July the index was at a six year high; now it has fallen to a four year low (excluding the dip in the aftermath of hurricane Katrina). The fall was led by expectations, down 11.3 pts (with labour market expectations down the most). The present measure fell only 2.6 pts, and there was actually a slight improvement in the assessment of the current state of the job market (first gain in four months).
US house prices down 4.9% yr in Sep. The S&P/Case Shiller 20 city measure decelerated further, falling for the 14th consecutive month (by 0.9%) for an annual price decline of almost 5%. The quarterly index decelerated from –3.3% yr to –4.5% in Q3, and the quarterly fall (–1.7%) was the steepest in the series’ 21 year history.
Fedspeak: Philly Fed’s Plosser was hawkish, downplaying rate cut prospects and musing about a possible rate hike if inflation picks up. Chicago Fed's Evans said that insurance [cuts] are now in place, that it is unlikely growth will be surprisingly weak and also noted inflation risks. He said that outside housing and finance, the economy is doing well. However, the risk of ongoing turmoil was acknowledged.
Japanese corporate services prices rose 1.4%yr in October. That compares to a downwardly revised 1.3% rise in September.
German Ifo index surprised by rising 0.3 pts to 104.2 in Nov after six consecutive declines from its April high of 108.6. Expectations did in fact fall again, to their lowest in just over two years, but this was offset by a rise in the current assessment.
German inflation spiked to 3.0% yr in Nov, its highest since early 1994. The EUharmonised measure was even stronger, rising from 2.7% yr to 3.3% yr, so there is now a realistic risk that the flash estimate of the Euroland CPI for November could hit 3% (data due 30/11).

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Published on  Wed, Nov 28 2007, 06:20 GMT

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