Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | May 22 09 01:34 GMT |

News And Views US jobs data disappointed investors, prompting a broad selloff in equities. The S&P500 plunged at the open, and remained weak to close down 1.7%. Chartists will point to Wednesday's key day reversal as the warning, and bears will note VIX jumped back over 30 (it appears 30 is the new 40, the psychological demarcation between optimism and pessimism). A significant jolt to US sentiment came from Standard and Poor's unexpected revision of the United Kingdom's sovereign (foreign currency) credit rating from AAA to AAA (negative outlook), citing the high government debt levels projected over the medium term. The announcement affected many asset classes in many countries, including US 10 year treasuries which sold off by 17bp. Credit default swaps for the UK, relative to Germany, were 5bp higher on the day. US 3mth Libor fell, as has been usual, but by a larger 5.5bp to 0.66%. While negative events have benefited the USD in the cycle, expectations that the US could be in line for the ratings chopping block saw the dollar index weaken by 0.9%. This breakdown in correlations saw EUR jump higher to around 1.39 at midday NY, after spending the European session fixed at 1.38 (some countries on holiday). GBP fell from 1.5800 to 1.5515 around the Standard & Poor's news, but climbed back over the next 6 hours to 1.5890, a 6-month high. USD/JPY posted a 2-month low, at 94. AUD was supported by USD weakness, the UK's rating producing a prolonged dip to 0.7670 before recovering to 0.7795. There was speculation the RBA may have sold AUD above 0.7800. NZD dipped a cent on the rating, to 0.6015, but is back around 0.6100. AUD/NZD slipped to a lower 1.27 to 1.28 range. NZ interest rate swaps rates are 5bp higher this morning, following US and AU rates. US Philly Fed posted virtually no headline improvement in May, rising 1.8pts to –22.6, indeed the new orders index was slightly weaker. Shipments and jobs, however, posted more significant gains, but even these readings are still consistent with sharply contracting activity. US leading index posted its first monthly rise since June last year in April. Almost half of the 1.0% gain was due to the surging stock market; interest rates and consumer confidence explained most of the rest although lower initial jobless claims and the work-week also contributed. This is a positive signal although a turning point is not usually called until three consecutive positives are recorded. US initial jobless claims fell 12k to 631k last week (the prior week was boosted by Chrysler related layoffs) but remained within the 605k to 674k range that has prevailed since the end of January. This is the payrolls survey week and with the 4 week claims average of 629k comparing to 648k in the same week in April, there are grounds for expecting a modestly smaller fall in non-farm payrolls in May compared to April. Japanese tertiary activity index slumps 4%. The index, which tracks household and business spending on phone calls, power and transport, recorded its sharpest fall in 12yrs, well below expectations of a 1.5% decline. Coming on the heels of the horror 15.2% annualised rate of contraction in Q1 GDP, the result underscores how the export-led slump is now permeating throughout the domestic economy. Euroland advance PMIs showed a further improvement in May, still consistent with declining economic activity in the second quarter, but not as drastically weak as Q1's 2.5% GDP contraction. UK business investment fell 5.5% in Q1, limiting the scope for an upward revision to Q1 GDP growth. Also UK retail sales volumes posted back to back rises in March and April in the newly revamped retail sales series. The April gain of 0.9% was close to our 0.8% forecast and reflected temporary factors such as the timing of Easter and the relatively hot weather last month Standard & Poor's revised its outlook on the UK's AAA credit rating from stable to negative, coinciding with the publication of April public borrowing data which revealed further deterioration in the UK's public finances. Recall that earlier this year, Spain and then Ireland lost their AAA S&P ratings. Outlook Monday is a London and NY market holiday, so we expect volatility tonight from heightened position squaring. Given positions are likely long risk currencies, any squaring should produce a selloff in NZD during the next 24 hours. Adding to the negativity, extrapolations of the UK's rating onto NZ, given the budget next Thursday, are possible. The 0.6130 level is still important resistance, though, and should that be exceeded for whatever reason, NZD would go much higher. Events Today Date Country Release Last Forecast 22-May US Fedspeak: Bernanke Jpn Bank of Japan Meeting 0.10% 0.10% UK Q1 GDP Revision –1.9% –1.8% Can Mar Retail Sales 0.20% 0.50% 25-May US Memorial Day Jpn BoJ Monthly Report Mar All Industry Activity Index –2.0% – Ger May Ifo Business Climate 83.7 84.9 UK Late May Bank Holiday 26 May NZ Apr Merchandise Trade NZDm 324 450 Q2 RBNZ Inflation Expectations 2.30% 2.10% 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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