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The USD remained bid in the overnight session on a lower gold price (5 week lows)

Thu, Jul 31 2008, 05:48 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The USD remained bid in the overnight session on a lower gold price (5 week lows), then announcement of changes to securities loan programs from the Fed, ECB and SNB, and then a continued equity bounce. The greenback even proved resilient in the face of a nearly $6/bbl rise in oil prices as weekly gasoline inventories unexpectedly fell. The New Zealand dollar was soft throughout, falling to a low of 0.7316.

The Australian dollar was also softer against the greenback, falling back near to 0.9400, its lowest since mid June.

USD/JPY rallied from 107.70/80 to highs above 108.30, of which about 30 pips came on the extension of the Fed’s measures to improve money market conditions.

Despite a slip to a 1.5522 low from above 1.5600, EUR/USD bounced in the NY afternoon to be only a little softer, around 1.5570 late NY.

US ADP private payrolls up 9k in July. The ADP private payrolls estimate of a 9k gain probably represents a return to the tendency of ADP to over-estimate the official estimate of private payrolls growth by around 92k, which it did in the first five months of this year, on average, before getting it “about right” in June. If indeed ADP does turn out to be 92k higher than the change in the BLS private measure, and government jobs grew around 25k, as they have recently, then total payrolls would fall 58k, a little below the average monthly job loss through Q2 of 64k. However our forecast is for a 75k decline in July, consistent with other employment indicators that, if anything, point to further deterioration in the labour market. We’ll know on Friday night.

Japanese industrial production fell 2.0% in June. That compares to a 2.3% rise in May and consecutive declines in March-April. For the quarter, production fell 0.7%, the same outcome as Q1. The annual rate slows from 2.5% in Q1 to 1.1% in Q2.

Japan’s small businesses feel the pinch. The Shoko Chukin survey fell to 39.9 in July from 40.7 in June.

Euroland business & consumer surveys point to slowing economy. This month’s collection of business and consumer surveys conducted by/for the European Commission and the private sector revealed a universally depressed economy in July. The business climate index turned negative for the first time in about three years; industrial and consumer confidence posted further steep declines, on top of the their June plunges; and overall economic sentiment was the lowest recorded since the mid 1990s (excluding temporary dips around 9/11 and the Iraq War in 2003). All of this should provide further justification for the European Central Bank to keep rates on hold next week. Indeed, if the data continue to soften in this fashion, then the case will be soon be made for the ECB to reverse their July rate hike – especially with annual headline inflation likely to fall sharply in mid 2009 if recent lower energy prices are sustained. One “bright spot” was a slightly less weak retail PMI this month, though at well below 50 (46.0), it is still indicative of weak consumer spending.

Outlook

We continue to like NZD lower multi week especially on a TWI basis. Rate cutting cycles from the US Federal Reserve, Bank of England and Bank of Canada over the past 12 months have shown that currencies typically continue to decline through the cycle, despite a market already expecting the future cuts to come.

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Published on  Thu, Jul 31 2008, 05:52 GMT