Australian dollar: USD softens ahead of FOMC's 50bp cut.

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Oct 30 08 01:52 GMT |

Market Highlights The FOMC cut the funds rate 50bp to 1% as was mostly expected (some economists saw -25bp, mmkts leant towards any surprise being a bigger move). The statement was gloomy on economic conditions (and thus unremarkable) including export prospects. The DJIA's initial reaction was to swing from gains to -100pts. Prior to this, USD Index had lost about -1.5% as improved European risk appetite saw the greenback lose safe haven/repatriation demand. Commodities were mostly stronger, including crude oil and copper. AUD/USD chopped around 0.64s in Ldn and early NY before rising from 0.6500 to over 0.6700 as US equities saw afternoon gains, then easing to 0.6620 on the Fed. EUR/USD whipped around but overall gained about a cent from late Asia to post-FOMC, at 1.2840. The DJ Euro Stoxx 50 rose 5.6%. USD/JPY traded sedately in London/NY, within 96.33-97.89, with the Fed statement trimming about 40-50 pips from the pair to 96.80. The PBOC cut its benchmark 1 year lending rate another 27bp to 6.66%. China has scope for more monetary as well as fiscal easing to ensure growth doesn't slow much further. NZD/USD pushed up from the low 0.57s in the London morning to the high 0.58s at the time of the FOMC announcement, which then knocked it to 0.5820. Economic data and events The US Fed cut its funds target by 50bp to 1.0% following this week's FOMC meeting. There were no dissenters. The statement noted that the economy had slowed markedly, in particular due to weaker consumer spending, while inflation was likely to moderate. Also cutting rates overnight... The People's Bank of China cut its benchmark one year lending rate by 27bp to 6.66% and the Norwegian Central Bank cut its key rate by 50bp to 4.75%.. US durable orders posted a 0.8% gain in Sep thanks to a bounce in civilian aircraft orders, a partial recovery in autos and a near 20% jump in defence. But the ex transport and ex defence numbers show that over the latest two months the orders picture has actually been very weak, consistent with the sliding orders picture painted by the business surveys. Notably, core capital goods orders deteriorated significantly in August and September, adding weight to the view that either business investment spending or exports (or both) will be weaker in Q3 and Q4. Inventory accumulation seems to have lost some momentum late in Q3 too. German inflation fell from 2.9% yr to 2.4% yr in Oct, pulled lower by heating oil and transport prices. Barring an unexpected renewed spike in energy prices and substantial further weakness in the euro, German inflation should be back below 2% by the end of this year, as base effects in November and December are very favourable. UK credit data remain soft. The UK mortgage market appeared to stabilise at very weak levels in Sep. The number of new loans issued has levelled off at around 72% below the early 2007 peak for three months now, and after an historic but modest reduction in mortgage outstandings in August (when repayments were greater than the value of new loans issued - something we have never seen in the modern era), lending once again rose modestly in September. Still very weak numbers - but not getting weaker. Consumer credit growth, on the other hand, collapsed to a fifteen year low last month, yet another reason to be very suspicious of official retail sales figures which held up better than expected in the third quarter. 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. 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