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Morning FX thoughts - 2 Aug '11

Tuesday 2nd August 2011

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Markets reeled after US manufacturing activity (ISM) plunged to a mid-2009 low. US equities held their post-debt agreement gains (+1.2%) until just before the release, the negative reaction leaving the S&P500 down 0.8% currently.

Commodities followed equities, the CRB index currently 0.2% lower, oil -0.8% and copper -1.6% (forming a technically bearish key reversal day).

China manufacturing data earlier in the day underwhelmed but had little market impact.

US 10yr treasury yields rose around 5bp to 2.85% during yesterday’s Asian session in response to President Obama’s announcement a debt ceiling and deficit agreement had been reached. The aftermath of the US data surprise, though, saw yields down to 2.72%.

The US dollar index was largely unmoved by the US debt ceiling agreement, gains versus the yen and franc offset by falls versus the riskier currencies which benefitted from the improvement in sentiment. It did, however, fall sharply in response to the US ISM.

EUR ground to a 1.4454 intraday peak before the US data pushed it to 1.4185. USD/JPY bounced from 77.30 to 78.05 after the debt agreement, but then slid to 76.30. A Nikkei report claimed the BOJ was preparing for yen intervention.

AUD benefitted from the debt news, rising 1.1010 to 1.1065, but started reversing during the London morning, reaching 1.0922. NZD failed to advance, falling to 0.8733 after the ISM. AUD/NZD ranged between 1.2500 and 1.2550.

AUD/USD and NZD/USD outlook next 24 hours: AUD has eked a 1.0910-1.1080 range during the past four days, requiring a break for directional guidance.

Today’s RBA meeting should leave rates unchanged, but markets will watch for offsetting  and inflation and consumption concerns. NZD momentum remains intact but it is becoming overbought, a wide 0.8620-0.8844 range likely to hold today.

Today’s wage cost report will be important.

Source: Westpac Global Markets

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