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Morning Report

FX markets traded comparatively calmly in London but the US dollar started to pick up steam in New York

Fri, Jul 18 2008, 05:55 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

FX markets traded comparatively calmly in London but the US dollar started to pick up steam in New York. The main driver was equities. A better than expected earnings report from JP Morgan before the New York market opened assisted equity futures higher from an already solid base. The NY morning was choppy on Wall Street but confidence grew, boosting USD, with help from a further sudden $6/bbl decline in oil prices to trade below $130 for the first time since 6 June. For the New Zealand dollar this saw trigger stop loss orders en route to losing a full cent to just above 0.7600.

The Australian dollar was range bound until it too succumbed to the USD short-covering wave, dropping from 0.9770 to just under 0.9700.

Equity-sensitive USD/JPY barely paused as it rallied from 105.35 to even poke its head above 107.00 before easing to 106.70 in late NY.

EUR/USD mostly gyrated between about 1.5820 and 1.5890 but did probe briefly below 1.5800 amid the equity rally and oil sell-off.

US housing starts up 9.1% in June. Housing starts and permits jumped 9% and 11% respectively in June, which looks strong until you understand that changes to NY building regulations that came into effect on July 1 saw builders scrambling to get apartment buildings approved and commenced before the end of the month. The new code covers emergency exits and stairways, green issues, access, even rat-proofing – and will make building more expensive. This distortion pushed up apartment starts in the north-east by 242%, and approvals by 135%! Excluding that regional component, starts were down 4% and permits rose just 0.7%. Nationally, single family starts and permits were even weaker, down 5% and 4% respectively, both to new cycle lows. So the bottom line is that despite the strong looking headlines, the housing market, if anything, has deteriorated further. That will be obvious in the starts and permits figures for July and beyond, which will look very weak given the pull-forward of new activity into June.

US Philly Fed factory survey was little changed in July at –16.3, with the headline still very weak and the component detail for orders, shipments and jobs within a few points of their soft June readings. This result contrasts with the more substantial rise in the NY Fed reported earlier this week, although that index remained in negative territory too. The prices measure surged further in July, although if recent oil price declines are sustained, the August price readings might show some pull-back.

US initial jobless claims up 18k to 366k, recovering part of the previous week’s loss but the figures continue to be distorted by the annual shutdown of auto plants for retooling (which the seasonal adjustment process cannot adequately cope with). That factor may also be behind the fall in continuing claims in the prior week. It will not be possible to draw firm conclusions about the labour market from this data series for several weeks yet.

The Bank of Canada in its Monetary Policy Report Update lowered its near term GDP forecasts for 2008 but left its 2009 and 2010 growth forecasts intact. Inflation was expected to rise above target imminently, peaking at 4.3% in Q1 next year, before moving back within the 1-3% target later next year. The Bank reiterated that current policy settings were appropriate.

Outlook

We continue to like NZD/USD lower multi week especially on a TWI basis. However, this week’s stronger than expected CPI release should hold off further rate cut expectations for now, hence the NZD is likely to range trade ahead of next week’s RBNZ meeting.

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Published on  Fri, Jul 18 2008, 06:01 GMT

Archive

• US consumer confidence rose to 56.9 in Aug
  Published On Wed, Aug 27 2008, 10:18 GMT
• 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