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Morning FX thoughts

Tuesday 26th July 2011

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There was little to excite markets last night. The US debt ceiling discussions remained the focal point but there was no material progress, rather a continuation of the piecemeal approach to negotiations. US equity markets were initially disappointed by this, the S&P500 falling 0.8% at the open, although it has recovered slightly to be -0.4% currently. Commodities are 0.6% lower, oil down 0.7%, but gold acted as a safe haven and made a fresh record high of $1624. US 10yr treasury yields spiked 7bp to 3.03% on growing concerns of a sovereign ratings downgrade, later settling at 3.00%. Eurozone peripheral debt was weaker, 10yr yields up 26bp for Italy and Spain, possibly affected by Moody’s three notch downgrade of Greece to Ca and comment that bond investors would likely take substantial losses as a result of the latest EU rescue plan.

The US dollar index unsuccessfully tested key support at 74.0 a couple of times. EUR consolidated just below trend resistance (from May) at 1.4420. The Swiss franc was a clear outperformer amid the US debt ceiling uncertainty, USD/CHF making a record low of 0.8021 during the London morning. USD/JPY made a four month low of 78.06 at the same time. AUD was helped by the US equities recovery and rose from the Sydney closing level of 1.0811 to 1.0877 in NY. NZD made a fresh high (just) at 0.8677. AUD/NZD rose from 1.2500 to 1.2550.

AUD/USD and NZD/USD outlook next 24 hours: As long as 1.0800 major support holds, AUD can continue its push towards 1.1012. RBA Governor Stevens speaks today in Sydney – a good opportunity to provide insights on monetary policy. NZD has a similar line in the sand at 0.8580 today, moderate event risk from today’s NZ trade balance report.

Source: Westpac Global Markets

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