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The US dollar came under broad pressure in overnight trade

Fri, Jul 11 2008, 06:03 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The US dollar came under broad pressure in overnight trade, with worries over the US financial sector to the forefront once again. Former Fed official Poole’s description of the govt-sponsored mortgage agencies as technically insolvent reverberated, along with fresh (unfounded) rumours about one of the investment banks. The USD jitters helped the New Zealand dollar recover from 0.7550 in the London morning to pop above 0.7600 before steadying back to 0.7580 by late New York.

AUD/USD was a little quieter, drifting up from 0.9585 to 0.9620, extending its gains made on Australia’s strong June employment report.

A resumption of oil price gains (jumping more than $3/bbl in the NY afternoon on reports of further Iranian missile tests) also lent support to the euro, with EUR/ USD gaining about 70 pips overall to 1.5780.

USD/JPY fell about 40 pips on the Iran/oil news to around 106.80 but overall the yen was little changed, as US equities bounced late and headed for a positive close.

US initial jobless claims fell 58k to 346k last week but the figures cannot be trusted because we have entered the period when US automakers temporarily shut down their plants for new model retooling. Because the particular weeks in July-August when factories are shut down vary from year to year, the seasonal adjustment factors cannot cope and the data swing wildly. The July 4 holiday will have been another potential distortion. In contrast, in the prior week, continuing claims soared to a new cyclical high, above 3.2mn for the first time since the end of 2003. That points to ongoing deterioration in the labour market heading into July.

Fed chair Ben Bernanke (and Treasury Secretary Paulson) testified in the House today on financial market regulation. Bernanke steered clear of current economic and monetary policy issues in his prepared text and the Q&A no doubt saving himself for next week’s semi-annual report on monetary policy and his associated testimony.

French and Italian industrial production down 2.6%/1.4% in May. German industrial production has already been reported down 2.4% in May; with Italian and French IP also slumping in May, next week’s Euroland IP report should also be weak (due 14/7). With survey evidence for June also very weak, the case against a further rate rise from the ECB is building.

The Bank of England left rates on hold at 5.0% following this week’s policy meeting. As usual, no move so there was no accompanying statement. The minutes to the meeting will be published in two weeks and it will be interesting to see whether anyone joined David Blanchflower in voting for a cut, given the recent flood of very weak activity data. Still, with inflation set to rise above 4% yr in coming months, one or more of the hawks may have voted for an ECB style “shot across the bow” rate rise as well. We’ll know on 23/7. On the data front, house prices keep falling away in the UK according to HBoS (and almost every one else!).

Outlook

We have been brazenly bearish on the NZD for some time now and have remained short via the TWI since April 24. But for the week ahead, we have to temper our negativity. If we are correct on our CPI forecast, it will make the July OCR outcome that much more difficult to price. With the OIS market allocating a 64% chance of a 25bps cut at the July meeting, we have to see some short term upside risks for the NZD and potentially the TWI.

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Published on  Fri, Jul 11 2008, 06:10 GMT

Archive

• Worries over GM and Morgan Stanley resurface
  Published On Fri, Oct 10 2008, 07:20 GMT
• Global central banks coordinate policy and ease by 50bp
  Published On Thu, Oct 9 2008, 07:01 GMT
• German factory orders jump 3.6% in Aug
  Published On Wed, Oct 8 2008, 09:44 GMT
• Panic continued to grip global markets in London/NY trade
  Published On Tue, Oct 7 2008, 14:07 GMT
• The US dollar see-sawed its way through a poor employment report
  Published On Mon, Oct 6 2008, 08:57 GMT

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