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NZD/USD rallied as far as 0.5574 in London as risk appetite improved

Wed, Oct 29 2008, 05:40 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The improvement in risk appetite seen late in yesterday’s session extended to offshore trade, to the great benefit of yen crosses but no clear movement in the USD. The Dow rose more than 500pts in afternoon trade, recovering from jitters after US consumer confidence collapsed to a record low.

NZD/USD rallied as far as 0.5574 in London as risk appetite improved, then chopped around from about 0.5480 to 0.5570 before surging above 0.56 as US equities finished strong. AUD/USD scarcely took a backward step, as its recent excessive punishment left it room to outperform, extending the local break through 0.6100 to above 0.6325 in NY as US equities consolidated their rally. NZD/AUD slipped from 0.9050 to below 0.8800 in the New York afternoon.

EUR/USD was notably range-bound, 1.2455–1.2588 in London, mostly gyrating around 1.2500. After its spike to a 96.13 in the London morning, USD/JPY steadied for a while in the high 94s before US equities gave the green light for a strong rally to over 97.00. Nikkei News claimed the BoJ is preparing to cut its benchmark rate 25bp to 0.25% on Friday.

US consumer confidence collapses from 61.4 to 38.0 in Oct. The Conference Board index plunged to its lowest level since the survey was first conducted in 1967. In large part the plunge was driven by deteriorating job market sentiment, which is now weaker than at any time during the recession earlier this decade, suggesting that upcoming jobs reports will show a sharply weaker labour market picture. Consumers’ assessment of the business environment and outlook, and income expectations, also deteriorated sharply. It seems that the economic armageddon that Fed chair Bernanke, Treasury Secretary Paulson and others have been warning about, coupled with plunging stock markets, has made consumers especially fearful about both the current situation and what lies ahead.

US Richmond Fed survey falls from –18 to –26 in Oct. The only surprise in the survey, whose manufacturing component fell to its lowest since 1993, was that the services and retail responses were not as weak as in September.

US S&P/CS house prices down 16.6% yr. The 1% fall in August was the steepest monthly decline since April. It is likely that the banking freeze that took hold in late September will be reflected in even steeper price declines in this series in coming months.

UK CBI retail survey –27 in Oct. Retailers reported another very weak sales month, though not as soft as earlier in Q3. Even so, readings at these levels imply a much weaker retailing picture than that reported in the official monthly retail sales report, which has lost some credibility of late.

German consumer confidence edged up from 1.8 to 1.9 in “November” according to the GfK survey (which was actually conducted in the first week of October, so it will have missed the latest panic on financial markets and increased talk of recession).

German inflation: the CPI annual rate in North Rhine-Westphalia fell from 2.6% yr to 2.3% yr in October. That is an early clue that Euroland inflation will dip further when the flash estimate is published for October on Friday

Outlook

The world economy is slowing rapidly and New Zealand is exposed on three fronts - tighter credit, weaker demand and lower commodity prices. A softer currency will be needed for an extended period to soften the blow. The USD remains in favour through this crisis, more by default than by merit.

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Published on  Wed, Oct 29 2008, 05:44 GMT