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Markets made a whippy close to the month overnight

Tue, Jul 1 2008, 06:09 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Markets made a whippy close to the month overnight. During the London morning the US dollar continued its offered tone before price action stabilized. Then when New York came in the USD gained some legs. There were plenty of “reasons” being mentioned but the most logical was a sharp increase in overnight dollar Libor to 3.61% from 2.50% due to month end liquidity concerns. This was enough to then drive a short squeeze in the USD. Once that was done markets quietened down again. Through all this the New Zealand dollar was relatively subdued. The pair put in an intra-day top of 0.7665 before then spending most of the session between 0.7625 and 0.7650, though it did dip below 0.7600 at one point, in sympathy with AUD and EUR.

The Australian dollar was also driven by USD direction. The Aussie put in a fresh postfloat high of 0.9668 in the London morning before falling below 0.9600 amid broad USD gains (higher equities, lower oil).

USD/JPY was the most active. The London morning dollar selling/risk aversion impulse saw the pair dip briefly through 105 before then heading back above 106.

EUR/USD was also driven by USD sentiment, trading up to 1.5835 early before trading around 1.5750 later on. There was ongoing chat and “sources” spin on the ECB and also China PM Wen reportedly called for the US to stabilize the dollar, helping weigh on EUR/ USD. Oil prices broke $143/bbl them slid to $140 or so, but it’s not obvious which is driving which.

US Chicago PMI edges up to 49.6 in June. June’s regional business surveys from various branches of the ISM/NAPM all recorded falling activity, although in Chicago’s case the decline was modest, with the headline just below the neutral 50 level (indeed it was the least weak result since January). Relative to May, the Chicago detail showed production slipping back quite sharply, orders still growing but at a slower pace and job losses less steep. Coupled with the weaker (i.e. more negative) readings from the district Fed factory surveys (NY, Philadelphia and Richmond) earlier in June, the overall message is that there is mild recession in industry, with some parts of the country worse affected than others. Tomorrow’s national ISM factory report will provide further guidance re the state of the sector.

Euroland inflation jumped to a new record high at 4% yr in June. The detailed breakdown is not available, but the German data released last week showed that fuel more than food was the main factor driving the June jump. A European Central Bank rate rise on Thursday now seems almost inevitable and markets are moving to price in the prospect of further tightening by year end (though Westpac’s view is that emerging weakness on the activity front should prevent a follow-up rate rise).

The UK housing market slump deepened dramatically in May, with mortgage lenders providing 28% fewer new loans than in April, and 63% fewer than in May last year. The combination of potential home-buyers expecting further falls in house prices with less willingness and/or ability to fund mortgage books on the part of the lenders has seen the number of new loans fall to below the previous cyclical low reached in the early 1990s recession. In contrast, consumer credit held up in May as shoppers used their credit cards to fund May’s retail sales surge, but because that was warm weather-driven we suspect it will not prove to be sustainable. Related to that, there was a further collapse in consumer confidence to a new 18 year low in June.

Canadian GDP growth bounced back 0.4% in April after contracting in February and March, helped partly by strong auto production, as US car-makers sought alternative parts suppliers during the recent strike. Although a little stronger than expected, note that Q1 also started strongly only to deliver a contraction in the quarter, so we can’t yet rule out the prospect of a technical recession in Canada in H1 2008.

Outlook

We continue to like NZD/USD lower multi week, as the market moves to price in more chance of a July rate cut from the RBNZ. However, with the Q1 GDP result now out of the way, near term direction is likely to be a little more two-way, as shown overnight, mainly driven by USD direction.

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Published on  Tue, Jul 1 2008, 06:13 GMT