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Morning FX thoughts - 26 Oct '11

Westpac Global Markets Strategy Group

Wednesday 26th October 2011

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Sentiment turned lower ahead of the key EU summit on Wednesday evening. Ongoing scepticism that any grand rescue plan can be properly implemented was supplemented by a smattering of negative news. US data (consumer confidence, house prices, and the Richmond Fed’s manufacturing survey) all missed estimates, as did the UPS earnings result for Q3.

German Chancellor Merkel voiced Germany’s opposition to any mention of the ECB as a non-standard lender in the new EFSF plan, and the EU finance ministers’ meeting ahead of the summit was cancelled (markets were initially spooked by this, but later realised the meeting was redundant).

The S&P500 reversed around noon London and is currently down 1.4%. Commodities haven’t followed suit, the CRB index up 0.7%, oil +2.7% silver +4.3%, but copper -0.8%.

US 10yr treasury yields are 11bp lower at 2.13%, forming a technically bearish (yield) key reversal, as well as flattening the 2-10yr curve by 8bp. A 2yr auction went very well, with a bid-cover ratio of 3.6 (12 month average is 3.4) and offshore bidding comprising 39% (32% average).

The US dollar index bounced when equities fell. Around London noon EUR tried unsuccessfully to test 1.3960 resistance for the third time this week and then fell to 1.3849, although it has recovered to 1.3920 as we write. Safe-havens outperformed, USD/JPY falling from 76.20 to 75.75 before recovering to 76.00.

A Nikkei report the BOJ will consider easing measures at this Thursday’s meeting produced only a brief spike. AUD unsuccessfully tested 1.0500 resistance twice last night, slipping with equities to 1.0397 but recovering to 1.0440.

NZD underperformed in the wake of yesterday’s weak CPI reading and downgraded Fonterra milk payout forecast, from 0.8060 to 0.7942. AUD/NZD is much higher at 1.3110 as a result.

AUD/USD and NZD/USD outlook next 24 hours: Australian CPI today and tonight’s EU summit are the main events to watch. Prior to that, AUD should continue lower to 1.0370. NZD appears to be heading for 0.7870 today. AUD/NZD is getting stretched but could run to 1.3200 before reversing.

 



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