Morning FX thoughts - 4 Nov'11

Westpac Global Markets Strategy Group

Friday 4th November 2011

European relief. Several catalysts helped risk markets rise during London and NY.

The initial and largest part of the rally related to an expectation the Greek PM could be voted out of office tonight, cancelling the planned referendum on accepting the bailout conditions.

Then, in a surprise move for some, the ECB cut its policy rate by 25bp, citing low growth.

Finally, during the London afternoon, the Greek PM announced to parliament he would abandon the referendum.

The Eurostoxx 50 closed up 2.5% and the S&P500 is currently up 1.7%. There was a minor selloff on new US primary bond dealer Jefferies Group’s share trading was halted after a 20% decline after a downgrade on suspected Eurozone exposure.

Commodities are higher, the CRB index up 1.3%, oil +1.7%, and gold up 1.5%. US 10yr treasury yields are 7bp higher at 2.06%, and formed a technical reversal signal (key day) pointing to a bond selloff during the next day or two. The Greek 10yr made a fresh record high at 26.93%.

The US dollar index is moderately weaker on the improvement in risk sentiment. EUR was choppy but is higher overall, rising from 1.3657 to 1.3835 but dipping to 1.3660 on the ECB rate cut, finally bouncing to 1.3855 on the scrapped Greek referendum.

USD/JPY did apart from testing the bottom of a 77.90 to 78.10 range. AUD rose from an early London low of 1.0203 to a post-ECB 1.0447, and then fluctuated between 1.0292 and 1.0434, currently at 1.0410.

NZD similarly rose to 0.7969 before gyrating to 0.7940 currently. AUD/NZD rose from early London’s 1.3030 to 1.3145.

AUD/USD and NZD/USD outlook next 24 hours: There’s plenty of event risk during the next 24 hours, with the important US payrolls report, the Greek confidence vote, and the conclusion of the G20 meeting. AUD formed a technically bullish key reversal day and targets 1.0480 above. NZD is undergoing a similar corrective bounce which targets 0.8025.

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