Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Aug 15 08 01:17 GMT |

News And Views

USD/majors traded quietly in London until the US data. The combination of higher inflation and elevated jobless claims sparked a bout of dollar selling on stagflation fears, as equity futures swung into the red. However, this proved fleeting, with renewed weakness in commodity prices and a bullish report from Goldman Sachs helping restore confidence that the USD recovery is not spent. NYMEX oil fell as much as $4/bbl at one point, partly undermined by oil billionaire Boone Pickens' prediction of $100-110/bbl near term (previously he was very bullish). The New Zealand dollar squeezed as high as 0.7059 10min after the US data but had retreated to 0.6990 by late NY.

The Australian dollar followed the pattern of most others, rebuffed ahead of AUD/USD 0.8800 and bumping around 0.8710 in late NY.

EUR/USD flickered to a 1.4952 high but by NY lunchtime hit lows around 1.4780, despite ECB's Stark's attempts to play down Eurozone recession fears.

USD/JPY mostly pushed higher from 109.50 but ran out of steam ahead of 110 as the US equity rally cooled from as much as +180pts on the DJIA to about +65pts late NY.

US CPI up 0.8% in July. The CPI posted another sharp jump in July, mostly due to a further 4.1% jump in gasoline prices and a well above trend 0.9% rise in food prices. The 5.6% yr annual rate was stronger than expected and is the highest since late 1990 but it will fall sharply in the last five months of this year. Food and gasoline prices started to fall in July but the survey timing missed much of that. More concerning was the second consecutive solid 0.3% rise in the core CPI. In July rents slowed but auto prices rose further, and education posted another above trend gain, and was joined by recreation. These two normally benign components make up 15% of the core CPI. On top of these factors, apparel prices roared up 1.1% (very strong given that annual apparel price inflation is only 0.8% yr). Some of these gains are probably a function of the weaker US dollar boosting import prices. On the soft side, medical care was once again below trend with a minimal 0.1% gain.

US initial jobless claims fell 10k to 450k last week but yet again we can't draw firm conclusions from the data about what's really happening in the job market because the Labor Dept has not been able to quantify the impact of changed claiming rules that have been well publicised and so taken advantage of by new and existing claimants. That said, the recent run-up in continuing claims looks to be at least partially genuine and the Labor Dept spokesman did say that 'an increase in firings' was a contributory factor. But we just can't be precise about it.

Japanese tertiary activity index falls 0.8% in June, underscoring yesterday's weak Q2 GDP figures. The result followed a 0.2% decline in May and was against market expectations of a 0.3% contraction.

Euroland GDP fell only 0.2% in Q2 but national data suggest Q1 will be revised lower when the more detailed report is published on September 3. Leading indicators point to at best flat growth in Q3. Also, July CPI inflation was revised down from the 4.1% flash estimate to 4.0%, and core inflation eased to 1.7% yr. This combination of stalled/slipping growth and peaking inflation will help pave the way for an eventual rate cut from the ECB. We don't expect a move before Q1 next year but do expect Trichet's tone in the September 4 press conference to be slightly more dovish.
Outlook

We see some further downside for NZD TWI but will re-assess after New Zealand's June retail sales data today.

Events Today
Country Release Last Forecast
NZ Q2 Real Retail Sales –1.2% –2.4%
Jun Retail Sales –1.2% –0.2%
US Aug NY Fed Empire State Index –4.9 –3.0
Jun Net Long Term TIC Flows $bn 67 52.5
Jul Industrial Production 0.50% –0.1%
Aug UoM Consumer Sentiment (Prelim) 61.2 59
Fedspeak
Can Jun Auto Sales 1.10% flat
Jun Manufacturing Shipments 2.70% 1.50%

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

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