Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Oct 15 08 01:20 GMT |

News And Views Markets focused on the news conference from Treasury Sec Paulson, Fed chief Bernanke and FDIC's Bair, discussing the TARP. There was little fresh detail but money market spreads narrowed on confirmation that e.g. FDIC will temporarily guarantee new bank debt issued out to 3 years. Credit default swaps pricing reflected increased confidence in financials. But the early >300pt gains on DJIA had been surrendered by the NY afternoon, bringing USD Index back to about flat vs late Asia. NZD/USD rallied 1.5 cents in the London morning to highs near 0.6350 but returned to the low 0.62s in NY as risk appetite waned once more. AUD/USD hit its 0.7239 high in the London morning but fell in sympathy with US equities later in NY, pulling it back below 0.7000. EUR/USD traded at 1.3670 in the NY afternoon, little changed vs late Asia but having trekked as high as 1.3769 in the meantime. ECB president Trichet praised the bold steps to help European banks and said markets needed more discipline, a la Bretton Woods post-WW2. London's improved risk appetite boosted USD/JPY as far as 102.98 but the return of US equity jitters knocked it back to 101.60 in NY. US consumer optimism falls from 46 to 41 in Oct. The IBD-TIPP index fell back sharply again in Oct as the banking crisis deepened, after several months of gains fuelled by lower gasoline prices. The survey of 903 adults was conducted in the week to Sunday October 12, so none of the responses would have benefited from the past two days of strength on the stock market. The biggest fall in the components was in Federal govt policies, down 6 pts, compared to 4 pt losses for the economic outlook and personal financial outlook. With the US Treasury announcing last night it would be injecting up to $250bn in capital into the banking system, and markets loving the news, we expect subsequent confidence surveys for October will not be as soft as this report. Japanese corporate goods prices rose 6.8%yr in Sep. That was slightly higher than expected, as prices fell back just 0.4% in the month against a forecast of -0.6%. The terms of trade improved in the month - a rare occurrence in recent years, with export prices down 2.7% in yen terms outperforming import prices (-6.7%). German ZEW survey down from -41 to -63 in Oct. Because most of the 300 or so responses to the ZEW survey of German-based investors and analysts were received last week, when the stock market melt-down was in full-flow, it is no surprise that confidence collapsed (Westpac's forecast was at the bottom of the market but the most accurate, at -65.0 for the headline German number). However a little over 10% of responses were provided on Monday, and based on that small sample, ZEW German headline would have fallen only about 9 pts, not the 22 pts we actually saw. That indicates that the co-ordinated government action over the weekend to bolster the banking system, and the subsequent favourable market response, has boosted investor confidence somewhat. Separately, a 1.1% rise in Euroland industrial production in August most likely represents a mid quarter spurt in activity (that also showed up in orders data) but we doubt it will be sustained. UK CPI hits 5.2% yr in Sep. The spike in inflation reflects previously announced energy bill price hikes that came into effect during Q3. There was also some inevitable spill-over into core inflation, as retailers and other firms passed on higher running costs to their retail prices. But from October, we expect lower fuel and food prices to begin to pull the CPI lower, and that coupled with favourable base effects through 2009 should quickly pull inflation back towards the 2% target next year and even lower in 2010. Canadian auto sales were reported down 2.3% in Aug. The StatCan guidance for September was that sales 'increased', with no qualification of the extent of the pace of growth. Outlook At the margin, the lack of long NZD longs to be unwound still helps the currency versus AUD during risk aversion surges and vice versa. NZD/USD direction remains tied to USD safe haven demand which we are inclined to see waning in coming weeks after the slew of aggressive government action. Events Today Country Release Last Forecast Aus Aug Westpac-MI Leading Index ann. 3.70% - US Sep PPI/Core -0.9%/0.2% -0.4%/0.1% Sep Retail Sales/ex autos -0.3%/-0.7% -1.0%/flat Oct NY Fed Empire State Index -7.4 -12.0 Aug Business Inventories 1.10% 0.70% Fed Beige Book Fed Chair Bernanke speaks Fedspeak: Bullard, Yellen Jpn Aug Current Account ¥bn 1556 1153 Eur Sep CPI (F) %yr 3.6% a 3.60% UK Sep Unemployment chg ‘000 33k 45k 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. 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