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Morning Report

The New Zealand dollar was well bid overnight

Wed, May 7 2008, 06:07 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar was well bid overnight, as improving risk appetite saw higher-yield currencies come back into favour. Commodities remained a strong influence, with oil printing yet another record high of 121.49, and other ‘soft’ prices (including milk) heading higher. Stop-loss buying took the NZD above 0.79 where it settled for the rest of the offshore session. The currency was unfazed by yesterday’s weak Auckland house sales figures and the confirmation that the emissions trading scheme would not be applied to petrol for another two years, which could have a substantial impact on the RBNZ’s inflation forecasts.

The Australian dollar was also well supported, topping 0.95 again this morning, but slipped slightly against the NZD. Having reached the key 0.8330 level (1.20 in inverse terms), flows in the cross have become more two-way, with some profit-taking and even some looking for an upward correction NZD/AUD. The RBA left rates unchanged yesterday, as while they appeared less confident that inflation would moderate with unchanged policy, they didn’t an explicit tightening bias as some were expecting. The AUD dipped to 0.9440 after the announcement but eventually recovered.

There was no major US data overnight, but news from the corporate world cast some doubt on the emerging view that the worst of the credit crunch is over. Mortgage financer Fannie Mae reported a larger than expected loss and said that it plans to raise $6bn of capital; UBS confirmed that it plans to cut 5,500 jobs; DR Horton, America’s largest homebuilder, reported a much larger than expected loss; and Merrill Lynch reported a 70% increase in ‘Level 3’ assets, the hard-to-value assets that are the most likely candidates for further writedowns.

Dallas Fed President Fisher said that a “very dramatic slowdown” would be needed to justify more rate cuts. He noted risks on both sides for the US economy, but said that previous rate cuts already discounted a significant slowing in the US economy. Fisher is at the hawkish end of the Fed spectrum, and dissented in the last three rate decisions.

The Canadian dollar gained after the Ivey PMI beat expectations in April. The fall from 59.0 to 57.6 was a healthy result given that the index usually falls quite steeply in April. In contrast, building permits fell 4.5% in March. A downtrend is now clearly in place, suggesting that housing sector activity will moderate in 2008.

The UK PMI services survey slipped from 52.1 to 50.4 in April – a new cyclical low which points to slowing GDP growth in Q2.

Outlook

With the New Zealand economy set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, the NZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile was given further support by the RBNZ’s dovish statement. However, any underperformance is more likely to be reflected in the non-USD crosses, with the US dollar still struggling to get traction even with the market now looking towards an end to the Fed easing cycle.

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Published on  Wed, May 7 2008, 06:10 GMT

Archive

• US consumer confidence rose to 56.9 in Aug
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• USD traded softer to start the week as US stock prices tumbled
  Published On Tue, Aug 26 2008, 08:19 GMT
• USD/JPY ground up from 109.00 to flicker above 110.00 in late NY
  Published On Mon, Aug 25 2008, 06:48 GMT
• US Philly Fed index improved to –12.7 in Aug
  Published On Fri, Aug 22 2008, 05:55 GMT
• Japanese June all-industry activity index fell 0.9%
  Published On Thu, Aug 21 2008, 05:58 GMT

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Westpac Institutional Bank  | ABN 33 007 457 14
http://www.westpac.co.nz | natalie_denne@westpac.co.nz