• Home ::
• Fundamental ::
• Market View ::
• Morning Report

• Send
• Print
• Add To
• Rss

Morning Report

b85f20c5-844a-42da-bdae-8a22e7655b6c

0

0

The New Zealand dollar followed what is becoming a familiar theme

Mon, Jan 14 2008, 06:06 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar followed what is becoming a familiar theme, making steady gains before succumbing to weaker equities once US markets opened. The NZD crept towards fresh highs around 0.7880 before sliding back to 0.7810 by this morning. QVNZ figures released early this morning showed that house price inflation slowed to a 10% yoy pace in December.

The Australian dollar failed to make further progress on Friday, remained mired around 0.8970 (a 50% retracement of the losses since November). Another record high in gold prices just short of $900/oz provided no real support, and the AUD dropped below 0.89 this morning.

Equity markets were given some reason for comfort after Bank of America confirmed that it would pay $4bn for US mortgage lender Countrywide. However, the market chose to focus on reports suggesting further significant writedowns by Citigroup and Merrill Lynch. Us equities have remained weak in recent days even with a 50bp Fed rate cut almost fully factored in, which suggests that they are extremely vulnerable to disappointment.

Currency markets largely ignored a blowout in the US trade deficit. The November trade report revealed surprising strength in goods imports, led by a price-induced 8.5% surge for industrial supplies. The export components revealed generally modest shortfalls following hefty gains through October. While higher oil prices where a significant factor, the ex-petroleum trade balance widened $1.6bn to $33.1bn. In a sign of weakening consumer spending, consumer goods imports fell 0.9% in November on the heels of large 3.1% fall the previous month.

US import prices were flat in December following a 3.3% rise in November. However, allowing for volatile oil prices over this period, the 0.3% rise in ex-fuel import prices was a solid result following the 0.5% rise in November. Export prices posted more uniform increases of 0.4% overall and 0.3% excluding agriculture. The market remains focused on downside economic risks, and as these build so too will the current inflation risks fade. But for the moment, persistent large gains in inflation measures remain a thorn in the side of easier Fed policy.

The Canadian dollar fell on weaker than expected employment figures, dragging the NZD and AUD lower as well. The 19k drop in December comes at the end of a year when employment rose in all but two months, leaving employment growth at a solid 2%yr pace. So while the weak jobs number has cemented expectations for a 25bp rate cut at this week’s review, the still lean 5.9% unemployment rate suggests that Canada’s labour market remains firm.

Outlook

The New Zealand dollar continues to creep higher, but remains consistent with the 0.74-0.79 range of recent months. Interest rate markets have seen a similar drift, in part due to a shortage of fresh information on the local economy lately. Things get more interesting this week though, with the Quarterly Survey of Business Opinion on Tuesday and CPI on Thursday. Rising interest rates and record-equalling petrol prices will give businesses some reason for concern (and the sector with the most reason to be upbeat – dairy farming – is not included in the survey), but the components such as capacity utilisation and difficulty finding workers will be crucial.

The CPI is likely to show headline inflation above 3% again, though this is consistent with both the market consensus and the RBNZ’s view, and in itself may not be enough to send the NZD higher. It’s the outlook beyond this that’s worrying – we expect inflation to average well over 3% in the next few years, and could even exceed 4% this year. As the market becomes more aware of this prospect, expect more talk about OCR hikes rather than cuts, and a further widening of the NZ dollar’s yield advantage, already at record highs.

• Download Full Morning Report

Published on  Mon, Jan 14 2008, 06:09 GMT