Morning FX thoughts - 15 Sept '11

Westpac Global Markets Strategy Group

Thursday 15th September 2011

Risk markets took heart from a joint statement from the German and French leaders that they are “convinced” Greece will remain in the euro area and that Greek fiscal efforts will restore calm to markets. That helped equity markets reverse a slump following a weaker-than-expected US retail sales report.

The Eurostoxx 50 closed up 2.3% and the S&P500 is currently up 2.0%.

Earlier news from Moody’s that it downgraded French banks Societe Generale and Credit Agricole by one notch was already largely priced in and had little effect on global markets, but comments from the Eu’s Barroso that it would soon propose a European bond issue gained traction early in the London session.

Commodities bucked the trend, the CRB index down 0.5% with oil -1.6% and copper -1.6%.

US 10yr treasury yields are up 3bp to 2.02%, while the 30yr auction swao exceptional demand. The Greek 10yr rose another 120bp to 25.68% although the 2yr did drop 225bp to 74.49%.

The US dollar index slipped amid the improved risk sentiment. EUR rose from around 1.3600 to 1.3748 before a midday slump to 1.3636, pressing on to 1.3778 following the Merkel/Sarkozy statement.

USD/JPY dribbled lower from around 77.00 to 76.61. AUD established an intraday triple bottom around 1.0180 and mimicked global risk sentiment, touching 1.0273 pre-US retail sales and at 1.0271 as we write.

NZD rose from a NZ closing low of 0.8142 to 0.8262 but struggled in NY, capped at 0.8230. That may be a reflection of AUD assuming a higher beta for now, AUD/NZD bouncing from 1.2420 to 1.2520.

AUD/USD and NZD/USD outlook next 24 hours: The AUD decline since 2 Sep has run out of steam and needs a bounce to 1.0400 during the next day or two. Australian vehicle sales are out today. NZD similarly could stage a corrective bounce to 0.8350 today, particularly if the RBNZ signals a rate hike for December. NZ swap yields are too low for such a rate projection, and the 2yr should bounce around 15bp on such an outcome, supporting the NZD on the day.

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