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Morning FX thoughts - 30 Sept '11

Westpac Global Markets Strategy Group

Friday 30th September 2011

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Sentiment was mixed. There was a some improvement during the London session but the mood soured during NY.

The main positive factors early on were the easy passage in Germany of the vote to expand the EFSF bailout fund, the 523-85 margin an endorsement of the solidity of Chancellor Merkel’s coalition government.

A batch of US economic data (Q2 GDP, jobless claims, and pending home sales) beat estimates, alleviating concerns the US is heading towards recession.

Earlier comments from Fed chairman Bernanke that further monetary accommodation will be provided if necessary, and the Bank of England’s Dale allowing for QE2 in the UK, added positively to the mix.

Negative events included the Swiss central bank’s chief Hildebrand saying the EU crisis will worsen during the coming months, and a Fitch downgrade of New Zealand’s sovereign rating from AA+ to AA, citing high external debt and slow growth.

The S&P500 has fallen 3% from the early NY peak to be currently down 0.3% on the day. The CRB commodities index is up 0.9% (oil +1.3%, copper -1.2%).

US 10yr treasury yields are little changed at 1.97%, having risen to 2.03% in London. The 7yr auction went well enough at 1bp above market yield and 3.0 bid-cover (vs 2.8 12mth average). Peripheral Eurozone debt performed well.

The US dollar index fell and rose inversely with risk sentiment. EUR peaked at 1.3679 around midday London and the fell to 1.3553. USD/JPY spike to 77.03 but is currently probing 76.65. AUD peaked at 0.9879 during the London morning and fell in NY to 0.9714.

NZD underperformed given the surprise downgrade by Fitch, earlier peaking at 0.7833 and currently at 0.7652. AUD/NZD consequently rose from 1.2600 to 1.2705.

AUD/USD and NZD/USD outlook next 24 hours: There is China PMI (HSBC version) and some minor Australian data (private sector credit, house prices) to watch today. AUD appears to have ended its corrective rally and should now break below 0.9700 towards 0.9620. NZD should remain pressured by the ratings action, and a break below 0.7640 today is likely, the next major target 0.7500. NZ data today (business confidence, building permits) could add to the negative tone.


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