Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Nov 03 08 00:20 GMT |

News And Views There were fewer month-end fireworks than feared in FX markets and equities, leaving USD Index little changed vs late Asia Friday. The DJIA's 144pt gain (S&P 500 +1.5%) was broadly representative of its intra-day trade, with no stunning volatility into the close. There were some jitters in the NY morning as the Oct Chicago PMI printed at an atrocious 37.8 (vs 56.7 in Sep and consensus of 48.0) but markets then stabilized. Equities took some heart from JP Morgan Chase's announcement that it would freeze home foreclosures for 90 days. The much anticipated London fixing saw huge volumes traded but it was not the lopsided scramble for USD that had been expected (and to at least some degree actively priced in). NZD/USD hit its 0.5748 low in early London then gradually meandered to 0.5825 at the NY close. AUD/USD entered London under heavy selling pressure, dipping as low as 0.6545 but was then relatively subdued, finishing the week at 0.6675/80. Large real money AUD selling at the fix met steady buying. EUR/USD was very subdued, mostly bumping around 1.2680 - 1.2800, closing the week at 1.2725. USD/JPY suffered some selling (to 96.50) as yen crosses weakened in the London morning but as equities recovered, the pair ratcheted back to the mid-98s by week's end. The Chicago PMI plunged to 37.8 in October, after spiking well above 50 in the last two months. The fall was flagged by the similarly weak Philly and New York surveys for October, and brings the Chicago survey to a level more consistent with past recessions. The production component more than fully reversed the unsustainable bounce of previous months, dropping to 30.9, and new orders fell to 32.5. Prices paid fell to 53.7, well down from the peak of 90.7 just three months ago. US personal income rose 0.2% in September, with a smaller than expected hit from the impact of hurricanes Gustav and Ike. Personal spending fell 0.3%, the biggest monthly slide in four years, and a 0.1% rise in the price deflator indicated that real spending was even softer. The core PCE deflator slowed slightly to a 2.4% annual pace, and in a more normal environment this would be causing the Fed some concern. US employment cost index rose 0.7% in Q2. The annual rate of growth slowed to 3.1% after peaking at 3.6% in Q1 last year, suggesting that a cyclical slowdown in wage growth is well under way. The University of Michigan sentiment index was boosted slightly to 57.6 for its final October reading, perhaps reflecting the fact that the scariest moments came in the first half of the month. Perceptions of current conditions were revised lower, but future expectations were a touch higher. One-year ahead inflation expectations finally yielded to the fall in oil and other commodities, with a big downward revision to 3.9% from 4.5%. The Eurozone CPI flash estimate fell further to 3.2%, from a peak of 4.1% in July. We expect further falls in coming months as commodity price declines feed through to consumer prices, and large monthly gains from last year start to drop out of the annual figures. This should give the ECB confidence to cut interest rates further. The Bank of Japan cut rates 20bps to 0.3%. The cut coincided with the release of the Bank's semi-annual Outlook report. The efficacy of such a small cut is highly debatable, but it should help domestic sentiment at the margin. The vote was 4:4, with the Governor's vote breaking the tie it would seem. Outlook We are neutral NZD/USD short term. To be sure, the NZD is oversold and we expect to see that being unwound this week. However, if we can push back up to the 0.60/0.62 level, we would be happy to consider selling strength. We see AUD/NZD higher, with scope for 1.18 multi-day, as an improved risk environment encourages unwinding of some of the excessive AUD shorts. Events Today Date Country Release Last Forecast 3 Nov NZ Q3 Labour Cost Index priv ord time 0.8% 0.80% Q3 QES Private Sector ord time 2.0% 1.00% Aus Oct ANZ Job Ads –1.4% – Oct TD-MI Inflation Gauge 0.4% – Sep Retail Sales (s.a) 0.6% –0.5% Q3 Real Retail Sales –0.6% 0.80% Q3 House Prices (ABS) –0.3% –0.5% US Oct Auto Sales mn ann'lsd 12.5 11.8 Oct ISM Manufacturing 43.5 40 Sep Construction Spending flat –1.0% Fedspeak: Lacker Eur Oct PMI Factory (F) 41.3a 41.3 European Commission Forecasts UK Oct House Prices %yr –12.4% –13.6% Oct PMI Factory 41.0 40 4 Nov NZ Oct ANZ Commodity Price Index –4.9% – Aus Melbourne Cup Day (VIC, ACT) RBA Policy Announcement 6.00% 5.50% US Sep Factory Orders –4.0% –1.2% Fedspeak: Fisher 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. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.