Morning FX thoughts - 28 July '11

Thursday 28th July 2011

Risk sentiment was weaker amid the US budget gridlock, lingering concerns on Europe, and some weak US data.

German Finance Minister Schaeuble said he opposed a blank cheque for the European bailout fund to intervene in the bond market, a reminder that the Eurozone debt crisis is not completely resolved.

US durable goods data was much weaker than expected, and the Fed’s Beige Book (regional economic conditions) reported only slow or moderate growth. The S&P500 is currently 1.9% lower and the VIX index of risk aversion spiked to a mid-June high. Thje CRB commodities index is 0.6% lower, oil down 2.2%, copper -0.8%, silver -1.3%, and gold -0.3%.

US 10yr treasury yields continued a directionless week and are 3bp higher at 2.98%. The 5yr auction was poor, awarded at 2bp above market yield, with a bid-cover ratio of 2.6 (vs 2.8 12-auction average).

The US dollar index is up 0.8% and has completely recouped the previous day’s loss, adopting a safe-haven identity on the day. Underperformer EUR fell from 1.4500 to 1.4339 by midday NY. USD/JPY bounced from an early London low of 77.58 to 78.17. Outperformer AUD pushed on to make a fresh post-float high of 1.1081 at the London open but then corrected to 1.1002. NZD made a fresh high of 0.8766 around the same time and then corrected to 0.8680. AUD/NZD is higher to around 1.2675, supported by the surprisingly strong Australian CPI release yesterday.

AUD/USD and NZD/USD outlook next 24 hours: AUD retains upward momentum for a push higher during the week ahead, but looks extended on an intraday basis and needs to correct to the 1.0800 area first. NZD, on the other hand, is overbought, warning of a correction during the week ahead to at least 0.8500.

Today’s RBNZ meeting poses major event risk.

Source: Westpac Global Markets

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