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Morning Report

The New Zealand dollar fell sharply yesterday

Fri, May 9 2008, 05:58 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar fell sharply yesterday after the shockingly weak jobs figures for the March quarter. Employment fell 1.3%, the largest quarterly fall in 19 years, suggesting an even quicker slowdown in the economy than we had expected. The market quickly moved to anticipate earlier rate cuts by the RBNZ – short-term interest rates fell by as much as 0.25%, and the currency fell from 0.7820 to 0.7720 after the release. While the currency didn’t make much more progress lower overnight, it tended to lag the other major currencies as they strengthened against the US dollar.

The Australian dollar, in contrast, was buoyed by its own employment figures, which rose strongly for the 18th straight month. The AUD suffered some guilt by association after the NZ employment figures, dropping from 0.9420 to 0.9350, but more than made up for this after the Australian data. The NZD/AUD continued lower to 0.8180, its lowest level since August 2006.

The US dollar generally slipped against the other majors as some of the recent optimism bled out of the market. US interest rates fell after the SEC said that it would require Wall Street firms to disclose capital and liquidity positions, raising concerns that this could uncover new problems. Insurer AIG reported a larger than expected $7.8bn loss and had its credit rating downgraded by S&P. Ten-year bond yields fell for a second day to 3.77%, down 20bp from their peak.

The European Central Bank left its repo rate unchanged at 4.0%. At the press conference, ECB president Trichet reiterated that “The firm anchoring of medium to longer-term inflation expectations is of the highest priority. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We believe that the current monetary policy stance will contribute to achieving our objective.” Hence we no longer expect the ECB to cut rates at its June meeting. Based on past form, we would have had a clear warning by now that a cut was imminent. On the data front, German industrial production fell 0.5% in March, its first decline in four months.

The Bank of England left rates unchanged at 5.0% following this week’s policy meeting. As usual when rates are on hold, no statement was issued. However we expect the BoE’s quarterly inflation projections, to be published on May 14, will show inflation heading modestly below the 2% target two years hence, paving the way for a June cut and subsequent further easing. We suspect that the BoE is worried that backto- back rate cuts (they last cut in April) would downplay the near-term inflation risks that a majority on the policy committee still see as serious. Nevertheless we see the BoE cutting every two months, to 4.25% by Q4 this year, with risks around that view skewed to the downside.

US initial jobless claims fell 18k to 365k last week, maintaining the recent see-saw pattern. The trend seems to have settled around 370k new claims per week, consistent with ongoing payroll job losses. Continuing claims remain close to the four-year high reached in mid April. In other news, wholesale inventories posted a relatively rare fall of -0.1% in March, which is consistent with our view that stocks will be a drag on growth heading into Q2. But the picture is confused by a sharp rise in wholesale sales which suggests the stocks rundown was involuntary (and hence could be reversed in coming months). Also the monthly chain store sales report showed a 3.6% yr gain in April compared to -0.5% yr in March; stronger than the weekly reports through the month implied.

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 supported by weak economic data and the RBNZ’s recent dovish statements. However, this underperformance is more likely to be captured against a basket of currencies, with the US dollar still struggling to rise convincingly against the higher-yielding currencies in particular.

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Published on  Fri, May 9 2008, 06:00 GMT

Archive

• The offshore session saw the USD continue to regain ground
  Published On Thu, Jul 24 2008, 05:49 GMT
• The New Zealand dollar popped its head over 0.7630
  Published On Wed, Jul 23 2008, 06:11 GMT
• The main news was oil and equity related
  Published On Tue, Jul 22 2008, 06:05 GMT
• The offshore FX session was very quiet Friday night
  Published On Mon, Jul 21 2008, 07:29 GMT
• FX markets traded comparatively calmly in London but the US dollar started to pick up steam in New York
  Published On Fri, Jul 18 2008, 05:55 GMT

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