Morning FX thoughts - 19 Jan '12

Westpac Global Markets Strategy Group

Thursday 19th January 2012

Another positive overnight session. US equities were volatile during the London session but rose in NY and are currently up 0.8%.

The newsflow was largely supportive, with a story the IMF was seeking an increase in its lending capacity from EUR385bn to EUR1tr (although the US Treasury later said it had no intention to do such).

A US homebuilders survey recorded a four year high and Goldman Sachs’ Q4 earnings beat low estimates, also helping sentiment. Negative news from Egan-Jones rating agency which downgraded Germany from AA to AA-, citing its increased burden via the EFSF and ECB, and Fitch which said six countries under review (including Italy, Spain, Ireland and Belgium) will probably lose one-two notches, had little market impact.

Commodities are little changed, the CRB index down 0.3% including oil -0.1%, copper +0.6%, and gold +0.5%.

Funding pressure continued an easing trend since 3 Jan, 3mth US Libor down 0.1% to 0.561%. US 10yr treasury yields are 1bp higher at 1.87%, trading in a 1.83%-1.88% range. Eurozone peripherals were quiet apart from Portugal, its 10yr yield rising 29bp to a fresh Euro-record of 14.54%. That was despite its 3mth-12mth bill auctions raising the targeted EUR2.5bn at lower yields, investors perhaps attributing less importance to short maturity bond performance.

The US dollar index is around 0.5% weaker but preserves the post-October upward trend - just. EUR rose from 1.2734 to 1.2864, and is threatening to break above a downward trend channel which started on 1 November.

USD/JPY remained range-bound and directionless between 76.65 and 76.87. AUD was also rangebound, between 1.0360 and 1.0428, perhaps restrained ahead of today’s employment data.

NZD rose from 0.8008 to 0.8082. AUD/NZD broke below 1.2925 support to 1.2870, continuing to confirm the rounded top formed in November and December.

AUD/USD and NZD/USD outlook next 24 hours: Australia’s employment report for December is today’s major event risk, Westpac’s economists expecting a below-consensus -10,000 jobs change. NZ’s Q4 CPI should be subdued and reflect GST dropping out of the annual headline rate. AUD daily momentum remains positive, the immediate range is 1.0360-1.0450. NZD’s immediate upside target is 0.8120.

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