Morning FX thoughts - 10 Oct '11

Westpac Global Markets Strategy Group

Monday 10th October 2011

European ratings news hurts sentiment. There was a positive tone until early NY, the positive surprise form the US payrolls report extending a three-day rally in US equities further, the S&P500 at one point up 0.6%.

However Europe reared its head again in the form of downgrade of Italy and Spain by Fitch. Italy was downgraded from AA- to A+ with a negative outlook, and Spain went from AA+ to AA- (negative outlook), the latter appearing to surprise he market most.

The S&P500 slumped and closed down 0.8%. After the close, Moody’s place Belgium’s Aa1 rating on review for a possible downgrade.

Commodities were mixed, the CRB index closing down 0.4%, oil +0.5%, copper +0.9%, and silver -2.6%. US 10yr treasury yields closed 9bp higher at 2.08%, reaching 2.12% after US payrolls.

The US dollar index dipped during the London session but rebounded for little change after the ratings downgrades.

EUR rose to 1.3525 in London and slumped to 1.3361 in NY. A meeting between Germany's Merkel and France's Sarkozy produced nothing more specific than an affirmation of the need for bank recapitalisations.

GBP outperformed, rising to 1.5646 before slipping to 1.5541. USD/JPY consolidated below a session high of 76.91. AUD rose to 0.9879 after US payrolls and slumped to 0.9734 after the ratings news, consolidating above that during the last few hours of trading.

NZD fell from its intraday peak of 0.7798 to 0.7695. AUD/NZD drifted slightly higher, from 1.2660 to around 1.2700.

AUD/USD and NZD/USD outlook next 24 hours: The negative European ratings news should weigh on AUD, at least until the London session, and down to 0.9600 is possible. NZD can similarly move down to 0.7600 support.

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