Morning FX thoughts - 21 Sept '11

Wednesday 21st September 2011

Risk markets ground modestly higher on expectations regarding tomorrow’s FOMC outcome and Greece’s discussions with the IMF/EU/ECB, but there was enough negative news flow to punctuate the trend.

The IMF cut its global growth forecasts for 2011 and 2012, the latter from 4.5% to 4.0%. Its US forecast for 2012 was cut from 2.7% to 1.8%.

ECB chief Trichet commented its own Eurozone forecasts have also been revised significantly lower.

Weak US housing starts data and German business confidence disappointments contributed to the mix, and as we write, the Athens News Agency reports the IMF troika plans to return to Greece in October to complete their review, dampening earlier speculation aid-approval was near.

The Eurostoxx 50 closed up 2.1%, but the S&P500 is now only +0.2% having earlier been +1.2%.

Commodities (CRB index) are 0.4% higher, although copper (-1.8%) made a 10-month low.

US 10yr treasury yields are little changed at 1.94%, but were as high as 1.99% midday London. A flattening of the yield curve by the Fed at tomorrow’s FOMC seems largely priced in.

Italian 10yr government bond yields rose 13bp in the wake of the one-notch Standard & Poor’s downgrade.

The US dollar index is slightly lower. EUR rose from 1.3600 to 1.3745 by midday London but then reversed to 1.3646. USD/JPY is probing lower at 76.36 after peaking in London at 76.71. AUD rose from 1.0187 to 1.0313 but slipped late NY to 1.0250.

NZD similarly rose from 0.8164 to 0.8266, slipping to 0.8225. Fonterra’s dairy product auction saw prices slip another 2.1% overall but there was little market reaction. AUD/NZD ranged between 1.2440 and 1.2490.

AUD/USD and NZD/USD outlook next 24 hours: Markets are very choppy at present but we remain of the view AUD could correctively bounce towards 1.0400 before making a fresh monthly low. NZD is similarly messy but likely to remain inside the recent 0.8120-0.8350 range today. There is NZ Q2 current account and Aug migration to watch today, credit card data largely redundant. RBNZ Governor Bollard speaks in NY tonight.

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