Morning Report

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The offshore session saw the USD continue to regain ground

Thu, Jul 24 2008, 05:49 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank


News and views

The offshore session saw the USD continue to regain ground, though more modest in scale. The story was more of the same from Tuesday night, with commodities continuing their recent softness and equities up again, albeit not by much. Oil prices probed above $128 but were firmly rebuffed, slipping to the low $124s in late NY trade, fresh lows since 5 June. The New Zealand dollar was soft throughout, spending most of the session just above 0.7500, in countdown mode ahead of the RBNZ decision.

The Australian dollar came under steady selling pressure, retreating from the 0.9680 area to 0.9610/15 by late NY, with stop losses triggered around 0.9660.

USD/JPY was bid on the stronger USD and better equity performance, with support also from reports of a Japanese insurer buying a US counterpart. The pair is closing in on 108.00.

EUR/USD was soft throughout, breaking below 1.5700 as oil retreated and US yields rose (2yr Treasury yield up 31bp over the past week, to 2.73%)

The Fed’s Beige Book found that the US economy slowed in June and July, with “sluggish” consumer spending in most districts. Retail price pressures were seen as “elevated or increasing” across the board, but there was limited evidence of any pass-through to wage pressures.

Eurozone industrial new orders for May were soft, the monthly number down 3.5% versus an expected 1.3% fall. The high EUR continues to hamper Europe’s manufacturing sector.

Bank of England minutes reveal 3 way split with 7 votes for no changes, 1 for a cut (Blanchflower) and a surprise 1 for a hike (Besley). While the vote for a hike was a surprise for us it reveals the underlying challenges facing the Bank of England – the economy is slowing rapidly but they cannot provide the stimulus necessary because short term inflation is now well above target. For us this is the worst of all worlds for GBP medium term, despite the short term bounce the announcement provided.

Canadian June CPI roughly as expected with the core rate up 0.1%mth (1.5%yr) and the headline a slightly stronger than expected 0.7%mth (3.1%yr).


Outlook

We continue to like NZD/USD lower multi week especially on a TWI basis. However, this morning’s RBNZ announcement is key.


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

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