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Morning FX thoughts - 9 Aug '11

Tuesday 9th August 2011

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Risky asset markets again tumbled. Following the weekend’s downgrade of the US, the S&P500 physical market plunged at the open and is currently down 5.6% to levels last seen in September 2010.

The VIX barometer of risk aversion spiked 12ppts to May 2010 levels. Financials were worst hit, down over 13% at one stage. Other countries’ bourses also reacted negatively, Europe losing 3.7% and the main Asians 2% to 4% lower.

The CRB commodities index is 2.8% lower, oil down 6.7%, copper down 4.5%, but defensive gold up 2.9% to a record high of $1720.

US treasury yields fell as investors sought refuge in the closest perceived substitute for cash. The 2yr fell 6bp to 0.23% - a record low – while the 10yr fell 23bp to 2.33% - a January 2009 low.

The ECB did intervene in the Italian and Spanish government bond markets, pushing the Italian 10yr yield 80bp lower and the Spanish 10yr 88bp lower, but there was otherwise little impact on global sentiment.

The outperforming currencies of the past 24 hours were the yen and franc, while emerging currencies and AUD and NZD underperformed.

The US dollar index rebounded from early London’s 73.97 to 75.0 early NY, currently 74.78. EUR fell to 1.4130 by the NY open and then stabilised around 1.4200. A plunge in European investor confidence data didn’t help.

USD/JPY consolidated between 77.50 and 77.90. USD/CHF made a fresh record low of 74.83 during NY before rebounding to 0.7570. AUD managed to hold above 1.0300 until the US equity slide accelerated a couple of hours ago, reaching 1.0209. NZD similarly ranged sideways  between 0.8255 and 0.8343 until a late NY dip to 0.8220. AUD/NZD fell from 1.2500 to 1.2400, AUD exhibiting a higher risk beta.

AUD/USD and NZD/USD outlook next 24 hours: Equity watching will again be paramount as a means of measuring risk sentiment, but a raft of Chinese data today, including CPI and industrial production, will also be examined for signs of economic slowdown. Australian lending and business confidence data are of relatively minor interest, as is NZ spending data. AUD has rapidly met our downside targets and now runs into thick congestion between 1.0000 and 1.0200 which should slow the fall. NZD’s downward momentum remains intact, the next target 0.8110 (12 July low).

Source:Westpac Global Markets



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