Morning FX thoughts - 16 Aug '11

Tuesday 16th August 2011

Investor confidence improved. Equity investors seeking bargains in Asia, Europe and the US in the wake of last week’s rout pushed the indices 1-2% higher.

Some high profile M&A activity also helped – Google is bidding for Motorola Mobility. The S&P500 is currently up 1.8% and the VIX barometer of risk aversion fell 4ppts. US data had only brief and minor influence, the NY manufacturing survey disappointing.

The CRB commodities index is up 1.2%, oil up 2.7%, copper up 0.6%, gold up 0.9%, and wheat up 1.4% (12% of the US is suffering extreme drought, according to the Conference Board, elevating food price inflation potential). The US 10yr treasury yield is 4bp higher at 2.30% on the better risk sentiment.

The US dollar index suffered from the risk-seeking, falling sharply around midday London and breaking below the ascending range since late July. EUR made an intraday low of 1.4264 during the London morning and then surged to 1.4477 before NY opened. The ECB confirmed it bought a non-trivial EUR22b of Eurozone bonds last week – its largest ever weekly volume. AUD was supported by the better sentiment, rising from 1.0387 during the London morning to 1.0513 as we write. NZD was curiously depressed, falling from a post-close of 0.8390 to 0.8273 in NY before stabilising at 0.8325. AUD/NZD surged from 1.2450 to 1.2650.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s rebound is impressive and the next corrective target of 1.0640 is in sight. Conversely, NZD struggles at 0.8400 major resistance. AUD/NZD is starting to break outside its August range and targets 1.2690 next. Today’s RBA minutes will be read for clarity around the recent “on-hold” decision. Tonight’s Fonterra auction will be watched by NZD traders.

Source: Westpac Global Markets Strategy Group

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