Forex - Morning Report (Westpac)

 Morning Report Thursday 19 January 2012
Market wrap
Another positive overnight session. US equities were volatile during the London session but rose in NY and are currently up 0.8%. The newsflow was largely supportive, with a story the IMF was seeking an increase in its lending capacity from EUR385bn to EUR1tr (although the US Treasury later said it had no intention to do such). A US homebuilders survey recorded a four year high and Goldman Sachs’ Q4 earnings beat low estimates, also helping sentiment. Negative news from Egan-Jones rating agency which downgraded Germany from AA to AA-, citing its increased burden via the EFSF and ECB, and Fitch which said six countries under review (including Italy, Spain, Ireland and Belgium) will probably lose one-two notches, had little market impact. Commodities are little changed, the CRB index down 0.3% including oil -0.1%, copper +0.6%, and gold +0.5%. Funding pressure continued an easing trend since 3 Jan, 3mth US Libor down 0.1% to 0.561%. US 10yr treasury yields are 1bp higher at 1.87%, trading in a 1.83%-1.88% range. Eurozone peripherals were quiet apart from Portugal, its 10yr yield rising 29bp to a fresh Euro-record of 14.54%. That was despite its 3mth-12mth bill auctions raising the targeted EUR2.5bn at lower yields, investors perhaps attributing less importance to short maturity bond performance.

The US dollar index is around 0.5% weaker but preserves the post-October upward trend - just. EUR rose from 1.2734 to 1.2864, and is threatening to break above a downward trend channel which started on 1 November. USD/JPY remained range-bound and directionless between 76.65 and 76.87. AUD was also rangebound, between 1.0360 and 1.0428, perhaps restrained ahead of today’s employment data. NZD rose from 0.8008 to 0.8082. AUD/NZD broke below 1.2925 support to 1.2870, continuing to confirm the rounded top formed in November and December.
Economic wrap
US producer prices fall 0.1% in Dec despite a 0.3% core increase. Food and energy (which make up 40% of the PPI) prices both fell by 0.8% but this was partially offset by a 0.9% rebound in light truck prices, a 0.4% rise in auto prices and 1+% gains in medication and tobacco prices. The annual PPI headline is now in a downtrend from 7.1% in July to 4.8% yr last month but the annual core rate hit a 30 month high at 3.0% yr. Intermediate and input goods prices were flat or falling both for the headline and core measures in Dec.
US industrial production rose 0.4% in Dec, reversing Nov’s 0.3% fall. A solid 0.9% bounce in factory output (led by autos, machinery, business equipment and construction supplies) makes this a healthy report consistent with recent more optimistic business surveys, but a 2.7% fall in utility output (led by plunging natural gas supply, down 16% in Nov-Dec) weighed down the IP headline.
US NAHB housing market index rose from 21 to 25 in Jan, its highest since mid 2007, and another sign that the housing market might have finally bottomed out, two and a half years into the economic recovery. US TIC data for Nov showed a resumption of inflows into US markets, $48.6bn in total and $59.8bn into long term securities. Nov was the month European concerns flared up again (Greek referendum/ECB rate cut) and the euro lost about 12 cents; these inflows into dollars are consistent with that.
Bank of Canada monetary policy report was released today expanding on yesterday’s statement. BoC Governor Carney said that the Bank and regulators are closely watching the housing market and cautioned that debt ratios are at record levels.
Euroland construction output rose 0.8% in Nov failing to reverse much of the previous three monthly falls which cumulated to about a 3% loss.
UK unemployment rose 1k in Dec and Nov was revised down from 3k to about flat so on the claimant count measure it seems the picture has improved after rises of 30k+ in mid 2011. But the separate ILO report showed an extra 118k out of work in the three months to Nov on top of a 114k rise in the previous quarter. And employment rose only 18k in the Nov qtr after plunging 178k in Jun-Aug. The jobless rate rose to 8.4%, its highest since the mid 1990s and earnings growth remained subdued at 2.0% yr.
IMF plans up to half a trillion $ expansion of its lending resources, having identified a potential need for a $1 trillion worth of bailout financing in the next few years. No detail yet although they would need to raise $600bn to incorporate a cash buffer in the Fund. European leaders have previously agreed to contribute more but the US and others are not keen. Also reports are coming through that Greece might be closer to a revised debt restructure deal with creditors.
World Bank global forecast downgrade. Their 2012 growth forecast was cut from 3.6% in June to 2.5%, and includes a 0.3% contraction in Europe.
Market outlook
AUD/USD and NZD/USD outlook next 24 hours: Australia’s employment report for December is today’s major event risk, Westpac’s economists expecting a below-consensus -10,000 jobs change. NZ’s Q4 CPI should be subdued and reflect GST dropping out of the annual headline rate. AUD daily momentum remains positive, the immediate range is 1.0360-1.0450. NZD’s immediate upside target is 0.8120.
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