Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Jul 14 08 01:15 GMT |

News And Views

It was a sadly familiar tale for the US dollar in Friday's NY session, hammered once again on the back of worries over the government-sponsored mortgage giants Fannie Mae and Freddie Mac. FRE opened a staggering 50% below Thursday's close, recovering much lost ground over the session but US equities overall stayed heavy, weighing on USD. This helped the New Zealand dollar rally from 0.7585 during the London morning to a high of 0.7648 before easing to a 0.7614.

AUD/USD was also a willing participant in the USD rout in the NY morning, punching through long-standing resistance to new post-float (1983) highs of 0.9716 before it too backed off to 0.9662.

EUR/USD made hefty gains, pressing up from 1.5775 to a high of 1.5943 near the time of the NZD and AUD highs (and oil >$147/bbl) but proved more resilient, popping up late to close at 1.5937.

The safe haven Japanese yen enjoyed strong demand in the NY morning, falling as far as 105.65 vs over 107 in late Asia-Pacific, closing the week at 106.27.

US trade deficit narrows to $59.8bn in May. The trade deficit unexpectedly narrowed in May due mainly to a reduced oil import bill, despite surging prices (i.e. volumes were down sharply). With exports continuing to grow, though more slowly than in April, the deficit edged back below $60bn again. However with import price data for June showing yet another 2.6% surge, mostly but not entirely due to rising oil prices, the trade deficit is sure to jump rapidly in coming months. That said, the real trade deficit narrowed by $3bn in May, which means net exports will make a bigger than expected contribution to Q2 GDP growth (which could come in closer to 2% than 1% annualised, depending on what the Commerce Dept assumes for trade and inventories in June).

US UoM consumer sentiment edges up to 56.6 in July. Consumer sentiment remained very weak in early July but, in line with weekly confidence measures, did not slump further, despite a renewed bounce in inflation expectations. It may be the case that the tax rebates helped boost spending in May (and possibly June), but with no confidence impact apparent, the risk is that sales slump again once the cheques have been spent.

Slumping share prices for Fannie Mae and Freddie Mac, the shareholder-owned firms that participate (as owners or guarantors) in half of all outstanding mortgages in the US, prompted Treasury Secretary Paulson to say that 'our primary focus is supporting [them] in their current form as they carry out their important mission'. The problem for the firms is that losses they have borne due to the mortgage market meltdown might have been greater than their capital, rendering them insolvent. Their regulator, the Office of Federal Housing Enterprise Oversight, also indicated that 'the steps necessary' would be taken to allow them to continue operating.

Japanese consumer confidence on expectations: very pessimistic. Confidence recorded a 32.9 outcome in June, down from 34.1.

Canadian employment posted its first decline this year in June (-5k), as factory jobs growth stalled and falling construction jobs offset strength in the commodity sector. Unemployment edged higher, firming the case against any retightening of monetary policy by the Bank of Canada, although the data are not weak enough to put a further rate cut back on the agenda. Also, the trade surplus widened to C$5.4bn in May as energy-driven exports strength more than offset another solid month of imports growth; and flat house prices in May add to the growing body of evidence pointing to a softening housing market.

Outlook

We have been brazenly bearish on the NZD for some time now and have remained short via the TWI since April 24. But for the week ahead, we have to temper our negativity. If we are correct on our CPI forecast, it will make the July OCR outcome that much more difficult to price. With the OIS market allocating about a 3 in 4 chance of a 25bps cut at the July meeting, we have to see some short term upside risks for the NZ$ and potentially the TWI.

Events Today

Date	Country	Release	Last	Forecast
14-Jul	NZ	May Retail Sales	1.00%	-0.5%
	Eur	May Industrial Production	0.90%	-1.0%
	UK	Jun Producer Prices %yr	8.90%	9.90%
15-Jul	NZ	Q2 CPI %qtr	0.70%	1.60%
		Jun Food Price Index	1.00%	0.30%
	Aus	Jul RBA Meeting Minutes
	US	Jun Producer Price Index	1.40%	1.80%
		Jun PPI Core	0.20%	0.20%
		Jun Retail Sales	1.00%	0.10%
		Jun Retail Sales Ex Auto	1.20%	0.60%

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