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Morning FX thoughts - 11 Aug '11

Thursday 11th August 2011

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Fear returned to the markets. There was little hard news to drive sentiment, rather a swirl of rumours regarding Europe.

The most widespread and unsubstantiated was that of an imminent downgrade of France, eventually quashed when all three major rating agencies affirmed the country’s AAA rating. That had little calming effect, French bank stocks heavily sold, Societe Generale at one stage down around 20%. The Eurostoxx 50 index closed down 6.1% to a level last seen in April 2009. The S&P500 plunged at the open and is currently down 4.4%.

Commodities appear to be lagging the move, the CRB index up 1.4% and oil +3.4%, although copper (-0.9%) and gold (+2.3% to a fresh record high) were as expected.

The US 10yr treasury yield fell 16bp to 2.09% and is currently at 2.12%. The 10yr auction result was very strong at 4bp below market for an auction record yield.

Eurozone peripheral yields fell moderately, probably reflecting ECB intervention in the Italian and Spanish bond markets for the third consecutive day. Norway’s central bank refrained from hiking due to market turbulence.

The US dollar index bounced 1.3%. EUR was strong at the London open, testing 1.4400, but plunged from midday as the rumours above took hold, reaching 1.4162. The yen outperformed. USD/JPY fell to 76.35 but rebounded in NY to 76.84. The recent safe-haven leader CHF lost its lustre after the SNB further increased franc liquidity, warning of fx intervention ahead. GBP fell from 1.6285 to 1.6123, the BOE downgrading inflation and growth forecasts. AUD peaked during the London morning at 1.0382 and then followed equities and the EUR lower to 1.0168. NZD similarly fell from 0.8384 to 0.8082 in the day’s underperformance. AUD/NZD accordingly bounced from 1.2320 to 1.2600.

AUD/USD and NZD/USD outlook next 24 hours: The FOMC’s latest policy initiative supported risk sentiment for less than a day, a worrying sign for asset markets. AUD should now test 1.0170 below and may find support around 1.0100. Today’s Australian employment report presents major event risk. NZD’s corrective bounce appears complete and a re-test of 0.8000 during the next few days is likely. AUD/NZD is forming a bullish key day reversal which would target at least 1.2800.

Source:Westpac Global Markets Strategy Group

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