Forex Exchange Morning Report

News And Views

Markets spent the past 24 hours looking wary and tired, with no significant net movement in either direction. US equities initially declined on negative surprises in economic data and a poor Microsoft earnings result, but has suddenly spiked as we write, to be down only 0.5%, on the White House saying they will move 'quickly' on a stimulus package. Currencies, which had few other cues, did little. WTI oil fell slightly, -1.7% to $43, on a new US Government report showing larger US stockpiles than expected. Industrial metals bore the brunt of the weak US and China data releases, copper down 2%. The Russian rouble effectively devalued by 10%, declining reserves forcing their hand. The most active arranger of NZD uridashi issues, Daiwa, said Japanese investors were avoiding foreign currencies and shifting to JPY bonds.

The NZD ranged between 0.5220 and 0.5340 overnight, as traders wonder what to do next. Westpac revised their forecast for the 29 January OCR cut from 100bp to 150bp.

AUD/USD ranged between 0.6490 to 0.6620, with no obvious technical clues on shortterm direction. AUD/NZD's range of 1.2350 to 1.2520 is now in its fourth day, which means a breakout, more likely to the upside, is imminent.

EUR's sideways range was approximately 1.29 to 1.31, with even the Rouble's dynamics not affecting sentiment much here. GBP was happy to range between 1.37 and 1.40, after the week's pounding. JPY was free of the option-related activity, and hung around 89, apart from a brief look at 88.

US housing starts drop 15.5% in Dec. The housing data were once again sickeningly weak. Back-to-back 15% declines in housing starts have taken the total decline in starts from their early 2006 peak to 76%. The new build housing market is imploding in the US, as potential buyers can't find finance, or are put off buying because of fear of unemployment, and most obviously, because builders simply cannot compete with the glut of foreclosed nearly new homes that can be snapped up for 50% less than they were sold by their builders just two or three years earlier.

US initial jobless claims up 62k to 589k. Claims have corrected sharply higher again after some lower outcomes which we suspect reflected seasonal adjustment difficulties around Christmas-New Year. With new claims back up at 589k in the January non-farm payrolls survey week, they match exactly the reading in the December survey week, also 589k, which was the highest result since the early 1980s.

Japan Dec exports declined 10.7% mth to take the annual pace down to a shocking -35%yr from -26.7%yr in Nov. So while imports fell 14%mth to -21.4%yr pace, it was not enough to prevent the trade deficit widening to -¥32bn from -¥223bn.

European industrial orders continue to slide sharply month by month, as global trade flows dry up. The annual pace of decline of 26.2% yr is the lowest on record. With other data showing French consumer spending slowing sharply in the closing months of 2008 (with autos and textiles especially weak), we reaffirm our forecast that Euroland GDP shrunk by 1.2% in Q4 last year.

UK CBI industrial survey found weaker orders and expectations for output and prices over the next quarter in its first survey for 2009. GDP growth for Q4 is due tonight and expected down 1.6% (by us); data like these aren't supportive of the view that this economic slump will be followed by a near-term GDP bounce!

The Bank of Canada monetary policy report update revealed the BoC expects the economy to decline by 1.2% in 2009 before rebounding 3.8% next year. Headline inflation will turn negative and core inflation approach 1% later this year, before rising back towards the 1-3% target mid-point in 2011. The bank judges that the risks to the inflation profile are 'roughly balanced', and with inflation forecast to be back at target in two years or so, it could be argued that the BoC is signalling no further easing for the time being.

Canadian retail sales dropped 2.4% in Nov, reflecting plunging auto sales and lower gasoline prices. The leading index fell 0.6% in Dec, its fourth straight decline.

Outlook

Today's forecast is the least certain for a while, short-term clues are absent. The best we can say is a range of 0.52 to 0.5350 should hold today, with Monday being a holiday in Auckland and Australia.

Westpac Institutional Bank
http://www.wib.westpac.co.nz/

Disclaimer

All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.