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Morning FX thoughts - 17 Aug '11

Wednesday 17th August 2011

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Sentiment soured during a volatile evening session. Weaker-than-expected Q2 GDP results from Europe initially hurt equities and risky currencies, although better reports regarding US housing starts, industrial production and capacity utilisation, as well as Fitch’s affirmation of the US’ AAA rating, later produced a sizeable bounce.

Sentiment was then hurt by the results of the Germany-France meeting on the Eurozone debt crisis. There were no plans to issue a collective Eurobond to fund troubled states or expand the EFSF bailout fund. The main tangible outcome was to tax financial transactions. After digesting all of the above, the S&P500 is currently down 1.0%.

The CRB commodities index is unchanged, oil is down 1.1%, copper -0.9%, and gold is up 1.0%. The US 10yr treasury yield was trading at 2.30% before the Germany-France meeting, swiftly falling to 2.20% afterwards. Eurozone peripheral debt was little changed.

The US dollar index is modestly firmer. EUR fell to 1.4354 after the GDP results, and apart from a spike to 1.4472 during the post-meeting headlines, settled around 1.4400. USD/JPY was stable between 76.66 and 76.93.

AUD followed US equities, making an intraday low of 1.0406 midday London and then rising to 1.0506 before the Germany-France meeting. It is currently recovering from 1.0420.  NZD similarly bounced around between 0.8272 and 0.8382 but was relatively resilient. The 0.9% fall in dairy prices at the Fonterra auction has no market impact. AUD/NZD fell from 1.2590 to 1.2500.

AUD/USD and NZD/USD outlook next 24 hours: AUD has retraced 50% of its decline from the peak on 27 July and a break above 1.0520 would then target 1.0640. NZD remains constrained by 0.8400 above. Australian wage inflation may be AUD supportive, while NZ PPI is dated news.

Source: Westpac Global Markets Strategy Group

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