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Morning FX thoughts - 25 Oct '11

Westpac Global Markets Strategy Group

Tuesday 25th October 2011

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Sentiment continues to improve. Hopes that this Wednesday’s EU summit will unveil the Eurozone rescue package remained supportive of risk markets, Germany’s Chancellor Merkel reportedly telling its lawmakers the EFSF bailout fund will be leveraged to EUR 1tr to cover funding needs for the peripheral countries during the next three years.

The earlier improvement in China’s PMI (private version), a stronger composite economic activity indicator from the Chicago Fed, plus influential Fed member Dudley’s dovish speech suggesting more support for housing also contributed to the positive risk sentiment.

The S&P500 is up 1.2% and has now retraced 62% of the decline since 2 May. Commodities were strong, the CRB index up 2.4% to a one-month high, oil +4.3% and copper +7.1%.

US 10yr treasury yields were are little changed over 24 hours at 2.23% despite the equities rally. Greek 10yr yields rose 30bp, other peripherals slightly higher.

The US dollar index is lower. EUR fell during the London morning to 1.3822, a weaker Eurozone PMI a partial explanation, but the NY surge in equities took it back to 1.3951 – a six-week high. USD/JPY tested important 76.0 support again but held.

AUD rose from the London morning’s low of 1.0366 to 1.0501 – a six-week high. NZD rose from 0.8028 to 0.8110. AUD/NZD rose from 1.2900 to 11.2960.

AUD/USD and NZD/USD outlook next 24 hours: Positive risk sentiment should push the currencies higher during the day ahead. AUD’s ascent will find resistance next at 1.0500 and 1.0570. NZD targets the 62% retracement level of 0.8150. AUD/NZD should continue to 1.3000. A heavy data week starts today with NZ CPI and the half-year fiscal update. RBA Deputy Governor Battellino speaks today in Sydney, and the Australian leading index is released.


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