Market Highlights

Australian dollar: Risk And The USD - New Bedfellows

The USD was given a boost last night by President Obama's announcement that tax cuts will comprise about 40% of the stimulus package, and a US construction spending figure for November which exceeded expectations. The DXY index rose around 1%, but so too did the commodity currencies, suggesting the USD has shrugged off its safe-haven identity for now. Supporting that view, the VIX index declined to under 39, gold fell 2%, and many food commodities rose around 1%. US 10 year notes rose 10bp amid long-run inflationary talk (such as in Barron's this week). WTI oil futures rose 4.6% to $48.50, geopolitical tensions an added factor.

Safe haven JPY lost ground amid the positive sentiment towards risk, to 93.20 from 92.0 during Europe's morning. EUR, too, slid from the 1.3930 level, and is hugging 1.36 at 7am Sydney time.

AUD looks strong, reaching consecutively higher highs last night, and opens around 0.7170. The NZD, rests at 0.59, after three attempts at 0.5920 last night failed. Traders will watch the monthly Fonterra milk powder auction at 13:00 GMT today. AUD/ NZD has found a slightly higher range, of 1.21 to 1.22, but a breakout looks imminent.

Economic data and events

US construction spending contracted 0.6% in November, not quite as negative as expected. Also, October was revised higher to -0.4% from -1.2%. Residential work slumped a further 4.1%, but non-residential activity increased by 1.0%. Little comfort can be taken from these numbers, with further falls ahead. The long lead times for construction projects is supporting non-residential construction for now. However, the credit crunch and recession point to sharp falls ahead.

UK December construction PMI hit a new record low of 29.3, down from 31.8. The series began in 1997. The reading highlights the dire state of the UK property market, where both the commercial and residential property have been hard hit by the credit crunch and the construction industry has seen significant lay-offs.

ECB's Constancio indicated ECB will cut rates if inflation slows too much, in order to keep inflation close to the 2% limit. As inflation data continues to fall officials have started to stress that the ECB's goal for price stability is symmetrical and that the central bank aims to keep inflation below but close to 2%. On the weekend, the ECB's Papademos said that further easing would be warranted if downside risks to price stability rise.

European investor confidence moved off a record low, improving to -34.4 from -42.3 in January. Interest rate cuts and government measures to stimulate the economy triggered the rebound.

On the data front, Swiss December manufacturing PMI unexpectedly improved to 36.9, up from a record low of 35.2 in November. Both Italy and Spain released preliminary December inflation figures, with the former showing a harmonized reading of 2.3%yr (median 2.4%), down from 2.7%yr in November, while Spanish CPI decelerated to 1.5%yr from 2.4%.

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.