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The New Zealand dollar was whipped around as the US dollar attempted a rebound

Fri, Mar 28 2008, 06:04 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar was whipped around as the US dollar attempted a rebound, but held above 0.80 overnight. A slightly more positive tone to the US data helped the USD higher, but rumours of investment bank Lehmans filing for bankruptcy protection (later denied) and forecasts of further substantial writedowns for other banks saw the market turn back to equity-watching again. Overall, offshore markets remain thin and volatile, with investors reluctant to do much ahead of the end of the quarter,

The euro was knocked down to 1.5730 by a large sell order early in the London session, but quickly rebounded to 1.5820, helped by rumours that China Investment Corp are in negotiations to buy Dresdner Bank. The yen softened as the market geared up for the launch of a record number of Japanese offshore investment trusts over the next few days, which are seeking to raise around US$16.5bn. The pound initially gained on stronger than expected investment data, but gave back its gains later in the day.

US Q4 GDP was unrevised at 0.6% annualised, while the Fed may take some comfort from the core PCE deflator being downgraded to 2.5% from 2.7%. The details showed consumer spending upgraded a little, with spending on services revised to 2.8% annualised. This was largely offset by a slight scaling back of both business and government expenditure. There were also revisions to the two big movers in the quarter – net exports and inventories. The inventory drag was even larger at 1.8% annualised (vs 1.5% prelim) and the net export boost was raised to 1.0% from 0.9%. Net exports and inventories are both likely to add to growth in Q1, but other indicators have deteriorated since – in particular, payrolls, retail sales and durable orders have disappointed of late.

US initial jobless claims eased back 9k to 366k in the last week. That came as no surprise, with the week prior boosted by workers in the auto sector who indirectly lost their jobs because of strike action. Also, there were downward revisions to the last couple of weeks. Even so, the trend in claims is upwards. The 4wk moving average increased to 358k, up from 312k a year ago.

UK Q4 business investment was revised sharply higher to a 1.8% increase from a 0.5% fall. Recall that the originally reported 0.5% decline came as a surprise to the market which was expecting a 1% rise. The revision to business investment clearly increases the risk of an upgrade to Q4 GDP from the 0.6% estimate, due Friday.

The UK CBI retail survey was soft in March, with only a net 1% of retailers reporting higher sales. Expectations for April were downbeat at –3. These figures suggest that the surprising strength in official retail sales over Jan and Feb is unlikely to be sustained.

Outlook

The US dollar’s bounce has run out of steam sooner than we expected, but with yields and the recent flows of news becoming relative more supportive for the USD, we’re not expecting another leg lower just yet. Locally, today’s Q4 GDP figures are likely to be solid – we expect a 0.9% gain with risks to the upside – but at the expense of growth in Q1, and other indicators suggest that data over the next few months will point to a ‘soft patch’ in the NZ economy in the early part of 2008. RBNZ Governor Bollard speaks this afternoon on the economy and monetary policy; the market will watch closely for anything to justify the early OCR cuts that are currently priced in.

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Published on  Fri, Mar 28 2008, 07:03 GMT