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The US dollar (DXY index) fell 1%

Tue, Jan 27 2009, 06:23 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank  |  View company's profile

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News and views

The market looked for reasons to buy risk last night, and found some in a better-than expected US home sales number, Barclays announcing a positive earnings forecast and no requirement for fresh capital, and a major takeover in the US drug industry (Pfizer/Wyeth). The FTSE closed up 4%, the Euro-Stoxx +3%, and the S&P500 followed suit initially, although it is fading into the close. Copper rallied 8% on the optimism and expectations of traditional post-Lunar New Year Chinese buying. Risk-aversion index VIX has fallen for four days in a row, to 46, but needs to be below 40 before any sentiment turnaround can be inferred. The US dollar (DXY index) fell 1%.

The NZD remained locked in the 0.5170-0.5370 sideways range for fifth day, initially sinking to around 0.5220, and then rising to 0.5340. Expect market positioning ahead of Thursday’s OCR announcement.

AUD/USD attempted a break upwards, but couldn’t breach 0.6660, which is required to change to a bullish medium-term view. It struggled after reaching around 0.6640 during early NY, and looks heavy at 0.6550 currently. AUD/ NZD remains contained in the wide 1.23-1.25 range, but is nudging the topside as we write.

GBP led the charge in Europe after the Barclays news, and spent the whole session moving higher, from 1.3550 to 1.40. EUR followed from 1.2870 and reached 1.32, before retreating to 1.31. There could be more legs in this rally from yesterday’s 1.2770 low. JPY was relatively subdued, continuing to cling to the 89 area.

US Dallas Fed factory index was somewhat less weak in January at –51 than at the end of 2008 (–61), a similar message to the other regional Fed surveys already released for this month. However the jobs component fell from –24.8 to –29.8, mirroring the weaker employment signals in the NY and Philly surveys.

US leading index up 0.3% in Dec, its strongest monthly result since July 2007, thanks to a 1.0 ppt positive contribution from the expanding money supply and a 0.2 ppt positive from interest rates. All the other eight components of the index were flat or negative.

US existing home sales jumped 6.5% in December but November was revised to an even steeper fall and the trend remains downwards. It was reported that 45% of these sales were “distressed”, so it would be wrong to regard the latest gain as an early sign of housing market turnaround. Emphasising that point, prices declined at the fastest annual pace ever recorded by the NAR.

Mortgage approvals by UK banks totalled 22.1k in December, up from 17.3k in December and down “just” 46% on December last year, compared to a 60% yr decline in November (though when the numbers are down as sharply as this, month to month volatility should not be misread a signs of a turnaround). Broader industry data including non-bank lenders will be published for December by the Bank of England later this week.

Outlook

We remain bearish on the NZD this week, and expect a breakdown below 0.5170, probably on the next attempt. Fonterra’s board meets today, but their payout announcement is expected to be tomorrow at noon.

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Published on  Tue, Jan 27 2009, 06:28 GMT

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