Morning FX thoughts - 19 Aug '11

Friday 19th August 2011

Risk sentiment plunged. The S&P500 is currently down 5.1% and the VIX barometer of risk aversion has gapped 13ppts higher to 44.

Sentiment had gradually soured during yesterday’s Asian session (the Fed’s investigation of US units of European banks’ ability to fund themselves in the markets being one catalyst) and reached a selling climax after the awful set of US data (Philly Fed manufacturing survey, existing home sales, jobless claims).

A slight increase in core CPI dented hopes of an imminent QE3. Commodities index CRB is down 2.3%, oil -7.2%, copper -1.6%, but gold is 1.8% higher to a fresh record at $1827.

Funding pressures continue, the US 3mth TED spread up to August 2010’s 30bp. Safe-haven buying saw the US 10yr treasury yield fall to a fresh low of 1.97% after the US data but has recovered to 2.07%, down 9bp on the day. Fed dove Dudley downgraded his US growth expectations but thought another recession was unlikely.

The US dollar index bounced with risk aversion. EUR fell from an early London peak of 1.4450 to an early NY trough of 1.4271 and then stabilised around 1.4320. Safe-haven yen outperformed, USD/JPY slipping from 76.70 to 76.45. AUD continued its Sydney session slide and accelerated after the US data to 1.0352. NZD’s fall was more pronounced, from 0.8340 to 0.8196. It’s underperformance helped push AUD/NZD from 1.2540 to 1.2650.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s upward correction since 9 August looks complete and a multi-day move towards 1.00 looms. Any bounces today should be contained by 1.04. NZD broke below its wedge-shaped range and is on course for 0.80 next week. NZ migration data today could help the bears.

Source:Westpac Global Markets Strategy Group

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