Morning FX thoughts - 22 Aug '11

Monday 22nd August 2011

Risk sentiment remained weak. There was no US economic data to influence markets, rather a swirl of minor news and rumours.

The EU said it may draft legislation for the issuance of collective European bonds, but Germany’s Merkel again voiced her opposition to such a step, saying it would leave Eurozone members worse off. The rumours included an emergency Fed meeting and a Swiss bank experiencing funding difficulties. The S&P500 closed down 1.5%, although the VIX barometer of risk aversion was unchanged, and the Eurostoxx 50 closed down 2.0%. The CRB commodities index rose 0.9%, copper up 0.5%, silver +5.7%, and gold making a new record at $1877 in London but closing unchanged. The US 10yr treasury yield was volatile between 2.04% and 2.13% but closed unchanged at 2.06%. The Greek 10yr yield rose 64bp after previous news that Finland would only lend to it on a secured basis.

The US dollar index closed slightly lower and formed a technically bearish key day reversal. EUR bounced on the EU news above, from 1.4300 to 1.4453 but then settled around 1.4400 until the NY close. It opens this morning in NZ lower at 1.4385. The Swiss franc outperformed, USD/CHF falling from 79.20 to 78.07, closing around 0.7880, although a Swiss newspaper claimed during the weekend that a EUR/CHF peg at 1.20 or higher is in the pipeline.

AUD firmed slightly overall, rising from 1.0350 to 1.0427 by the NY open, but then sagging with US equities to 1.0406. NZD similarly rose to 0.8289 but the risk averse phase of the evening pushed it down to 0.8173. AUD/NZD rose without interruption after the Sydney close, from 1.2600 to 1.2730.

AUD/USD and NZD/USD outlook next 24 hours: Any AUD bounce today should be limited to 1.0500, but a break below 1.0300 will signal the downtrend has resumed. Similarly, NZD bounces today should be capped at 0.8300, a move to 0.8000 expected during the week.

Source: Westpac Global Markets Strategy Group

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