Forex Exchange Morning Report

News And Views

The NZD and AUD held their ground while the other major currencies slipped against the US dollar in a holiday-shortened session. The New Zealand dollar was dragged higher yesterday by a stronger AUD, as traders took advantage of thin conditions to take out resistance in the AUD around 0.9110. The NZD continued higher overnight, but was initially capped by regular offers at 0.7950. On its second push higher the regular sellers disappeared, and NZD reached a high of 0.7955.

The Australian dollar reached fresh three-month highs as the market digested the news that a Japanese steel mill has agreed with Brazilian miner Vale to a 65% increase in contracted iron ore prices. This deal is expected to set the benchmark for price negotiations by other miners such as BHP - and with metals and other minerals accounting for about a third of Australia's exports, the implications for their terms of trade are very positive. RBA Assistant Governor Edey's speech this morning is likely to repeat their positive assessment of the Australian and Asian economies.

Offshore markets were quiet, with the Presidents' Day holiday in the US and a half-day for many markets in Europe. European equity markets began the week with a positive tone, helped in part by comments from Qatar's PM said that they plan to invest as much as $15bn in European and US banks over the next year, and by press reports that bank earnings, to be reported over the next couple of weeks, could be better than expected.

The pound fell further overnight, as the UK market returned to the news that UK bank Northern Rock has been nationalised. Northern Rock's new chairman noted that it could take the bank years to repay £25bn of government loans. The Rightmove measure of house prices (one of seven in the UK) rose 3.2% in February - stronger than expected, but unlikely to persist given the growing inventories of unsold homes.

Outlook

Like many of the major currencies, the New Zealand dollar has held to familiar ranges over the last few months. There is little economic data in the near term to drive the direction in the currency, investor positioning appears to be broadly neutral, and many are holding out for better levels to buy or sell. That may sound like a recipe for continued range-trading, but that in itself suggests that complacency is becoming a danger. In particular, the market seems ill-prepared for a break higher in the NZD.

The AUD has risen to three-month highs, but its slow progress remains a puzzle. The Australian economy continues to power along, with the unemployment rate ticking down to a fresh 33-year low last week. Interest rate markets have gone a long way towards pricing in RBA rate hikes in March and beyond, and a strong read on wages (Wednesday) should seal the case. One some measures, the NZ-AUS yield gap is at its narrowest in nearly four years, so it's surprising that the exchange rate has barely moved in the last month. However, selling NZD/AUD is a heavily populated trade, and we suspect that if the AUD moves higher the NZD is likely to follow, with the positive sentiment effect outweighing any further cross selling.

Events Today

Date	Country	Release	Last	Forecast
19 Feb	Aust	RBA Assist. Gov. Edey Speech (09:30 AEDT)
		RBA Minutes of Feb Meeting
		Jan Merch Imports AUDbn	15.7	-
	US	Feb NAHB Survey	19	19
		Fedspeak: Stern
	Can	Jan CPI %yr	2.4%	2.3%
		Jan CPI Core %yr	1.5%	1.4%
		Dec Wholesale Sales	0.3%	0.2%
20 Feb	Aust	Dec Westpac-MI Lead Idx	6.4%
		Q4 Wage Price Index %qtr	1.0%	1.2%

Westpac Institutional Bank

Posted in: Forex