Morning FX thoughts - 9 Sept '11

Westpac Global Markets Strategy Group

Friday 9th September 2011

Markets remain decidedly risk averse. Neither Chairman Bernanke nor President Trichet instilled much confidence today sending equities lower and the USD higher. Trichet sounded more dovish at the ECB's monthly press conference - the ECB cut their growth and inflation forecasts and they moderated their assessment of medium term inflation risks. The ECB has entered an extended pause. But, the tone of Trichet's last press conference was somber, even combative at times and did little to assuage concerns about the EU debt crisis.

That, and the more dovish tone saw EUR/USD fall sharply overnight, from around 1.4050 to lows of 1.3950 in NY AM trade. Bernanke's speech later in the day prompted another leg lower sending EUR to session lows of 1.3876. Key long term technical supports for EUR have given way today - bullish trendline support going back to June 2010 and the 200 day moving average were both pierced. EUR fell against all the G10 currencies with the obvious exception of CHF.

AUD and NZD were solid outperformers in European trading and through a good part of the EUR carnage but gave back their gains as the day wore on. From post-employment lows beneath 1.06 AUD ground back to 1.0660 by mid-morning NY. NZD rose from around 0.8320 to 0.8380.

However, as Benanke's speech commenced EUR's sell off accelerated and both AUD and NZD relinquished their gains. Bernanke's speech was mostly a rehash of his Jackson Hole speech. He offered no specific fresh clues for the all important 20-21 Sep FOMC meeting. Bernanke noted the Fed retains a range of tools and that the FOMC will evaluate its options at their next meeting. The lack of specifics weighed on sentiment. BY NY afternoon trade the AUD was chopping below 1.06 while the NZD was back near 0.8320.

The Dow Jones Industrial Average fell 85pts (-0.7%) overnight, gold rose $41/oz while copper was firmer (oddly), rising 0.6%. On the data front the US trade deficit narrowed almost $7bn to $44.8bn in July while US initial jobless claims rose 2k to 414k in the week ending Sep 3. The pace at which firms are laying off workers seems fairly constant of late.

German exports were down 1.8% in July. That is the third month in four that export values have fallen, and annual growth has slowed from 21.6% yr in Jan to just 6.9% yr six months later. The result contrasts with surging industrial production (up 4% in July) although foreign orders for German factory output have softened lately.

Outlook: Statistics NZ release monthly credit card spending data for August today. Westpac expects a 0.5% rise. There is no data on tap in Australia today. China CPI and industrial production data for August is due later this morning. President Obama delivers his much anticipated "jobs speech" to a rare joint sitting of Congress today as well.

A $300bn package including an extension of the payrolls tax cut and infrastructure spending is widely expected but it will probably be met with a fair amount of scepticism. AUD and NZD should be commended for their stoicism but the broader atmospherics remain decidedly risk averse. EUR has broken important long term support levels as well. Sellers are likely to cap both AUD and NZD on strength. A short term double top in AUD is in place at 1.0660 while NZD will struggle into 0.8400.

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