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USD extended its gains across the board

Mon, Aug 11 2008, 06:22 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

USD extended its gains across the board, with DXY adding another 0.9% to its highest levels since 21 February. A 303pt surge in the DJIA helped on a day with no notable US economic data. Oil dropped about $4/bbl vs late Asia-Pac trade, to its lowest close since 1 May. Equities rallied strongly on the sagging oil prices, brushing off a worse than expected $2.3bn Q2 loss by Fannie Mae. The New Zealand dollar however was somehow exempted (admittedly after heavy losses in local trade), creeping up about 20 pips to 0.7045.

The Australian dollar’s unwinding continued, with AUD/USD ratcheting lower, with the 0.8866 low the weakest point since end-Jan.

EUR/USD sank about 1% to close New York just over 1.5005. The break below 1.5000 – for the first time since 27 Feb – proved less eventful than expected.

USD/JPY pressed higher, though a little less forcefully than might have been expected, given the huge equity rally and the broad demand for USD.

US productivity growth moderates to 2.2% annualised. Productivity growth slowed a little in Q2 because the stronger pace of non-farm output growth was offset by a smaller fall in hours worked than in Q1 (payrolls had implied a steeper fall in hours). However unit labour costs growth slowed because lower productivity was more than offset by weaker growth in pay. Also non labour unit costs fell in the latest quarter. All subdued from an inflation perspective.

US wholesale inventories up 1.1% in June. Fuel and food price gains contributed to the 1.1% rise in the value of wholesale inventories although excluding those components stocks still rose 0.4% - not enough to make a material difference in any revision to the (negative) contribution of stocks to Q2 GDP growth.

Japanese core bank lending rose 2.5%yr in July. That compares to a 2.4% pace in June. Overall lending rose 1.8%yr, up from 1.7% in June. Total deposits are growing at the same rate.

Canadian employment fell 55k in May, its biggest monthly drop since the early 1990s. We had been expecting a correction lower in factory jobs after unusual strength back in May and they fell 32k, but there was also a steep 37k fall in services jobs. Perhaps softening the data a little, full-time jobs were only down 7k, while part-time fell 48k. Indeed it was mostly part-time jobs that explained strength in employment earlier this year, so this result should be seen as corrective from that. The unemployment rate fell slightly, because those surveyed who lost/left their jobs, left the workforce altogether. With services jobs likely to correct higher next month (some of the loss was in education which is normally non-cyclical), it is unlikely that this report will overly influence Bank of Canada thinking, but it certainly argues against any near-term retightening of monetary policy.

Italian GDP growth fell 0.3% in Q2, against expectations growth had merely stalled, and its second quarterly decline in three quarters. This means that the Italian economy has not expanded at all compared to the same quarter in 2007. With German growth certain to correct sharply lower from Q1’s 1.5% in Q2 (one leak suggested it fell 1.0%!), we now see downside risk to our Euroland GDP forecast of –0.3% in Q2. Also, the European Central Bank’s latest bank lending survey revealed even tighter lending standards which suggests the recent slowdown in the ECB’s own M3 money supply and lending statistics will continue.

Outlook

Given New Zealand’s better than expected Q2 employment data, we cut half our short NZD TWI position and suspect the greater gains short term could be through short NZD/USD.

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Published on  Mon, Aug 11 2008, 06:26 GMT