Market Highlights

Australian dollar: Euro so low

The weakness in Eurozone data continued to surprise pundits: last night's December CPI estimate of 1.6% (see below), below both expectations and the ECB's stability threshold, and pointing to deeper rate cuts ahead, knocked the EUR and boosted the USD. Commodities continued to recover, as the risk-climate retains its New Year optimism, copper up 7% at the NZ open, and WTI crude oil holding firm at $49. Equities rallied widely across the globe, and risk-aversion measure VIX fell to 38 (recall it was 89.5 in October 2008). The FOMC December minutes revealed the committee's negative economic expectations.

This week's spotlight has shone mainly on the EUR, falling again last night to just above 1.33 on the Eurozone CPI news, but recovering some to 1.35 in Australasia. GBP staged a rare 3% rally to almost 1.50. JPY weakened against the USD to the 94.60 level, Toyota's temporary halt in production a likely culprit. AUD performed well, breaking through the 0.72 resistance level, and holding comfortably above that. NZD followed suit, finally breaching the 0.5920 level after four earlier attempts, and is heading towards 0.60 (overlooking the low Fonterra auction price). The AUD/NZD cross remains in the 1.21 to 1.22 range, after a false breakout last night was quickly corrected.

Economic data and events

US ISM non-manufacturing recovered somewhat in December, but remained in the contractionary zone at 40.6 up from 37.3. That was better than expected (mkt 36.5). Business activity was soft at 39.6 (but up from 33.0) and it was a similar story for new orders (39.9 up from 35.4). Employment did improve a little but was very soft at 34.7, up from 31.3.

US pending home sales slumped 4.0% in November, following a revised 4.2% drop in October. That is against the worsening credit conditions late in 2008. Even so, the rate of annual decline has moderated to -9.6% from -20% a year ago.

US factor orders dropped 4.6% in November after a 6% fall in Oct. The detail for November was not as weak as the headline suggests. It was non-durables that fell 7.4% in the month - partly reflecting price falls, particularly for petrol. Durables declined by 1.5% in November and shipments dropped 5.3%. However, on the plus side, core capital goods orders (ie. ex defence and ex aircraft) rebounded 3.9% after a 6.7% tumble in Oct.

US Dec 16 FOMC minutes, not surprisingly, indicated the Fed's concern about weakening economic conditions, as well as the risk of deflation. Some members expressed the need for improved communications at a time of reliance on the expanded balance sheet to help ‘liquefy' the system.

ECB's Constancio said ECB can't let inflation stabilize 'well below ' its 2% ceiling. Constancio said at a press conference that 'monetary policy has given its contribution and should continue to do so if inflation threatens to fall significantly below 2%'. He added that 'any risks of inflation settling well below that level must be preventively contained with interest-rate reductions'.

Inflation moderation is opening the door for another ECB rate cut. European preliminary December HICP inflation dropped to just 1.6%yr (median 1.9%), from 2.1%yr in November.

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

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