Morning FX thoughts - 3 Aug '11

Wednesday 3rd August 2011

Risk aversion reigned. Global equity markets took significant hits, Korea’s KOSPI -2.4%, Eurostoxx 50 -1.9%, and the S&P500 currently -1.6%.

Markets remained concerned about the fragility of the global economic recovery, the latest evidence of weakness being US personal spending and personal inflation data.

Fundamentals now dominate the market’s mindset with last night’s passing of votes (74-26 in the Senate) on the US debt ceiling. Fitch rating agency commented the agreement was a step in the right direction, but that a longer term plan was needed to maintain its AAA status.

Commodities were mixed, oil -1.1%, silver +2.9%, and safe-haven gold +1.9% to a fresh record high of $1651. Fonterra’s dairy product auction saw prices slip 1.3%.

US 10yr treasury yields fell 14bp to 2.60% on a flight to “quality”. The Eurozone periphery still looks unsettled, Italian 10yr yields gapping 25bp higher to 6.25% - a March 1997 high.

The US dollar index firmed slightly. EUR made a two week low of 1.4150 around midday London and then consolidated. Safe-haven Swiss franc outperformed, USD/CHF making a fresh record low of 0.7643. AUD underperformed the majors in the wake of yesterday’s RBA meeting which disappointed bulls, falling to 1.0797.

NZD also performed poorly, down to 0.8671. AUD/NZD slumped after the RBA meeting from 1.2550 to 1.2420- eventually.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s break below 1.0910 suggests a deeper correction about to unfold. 1.0800 support is currently being tested and a break should swiftly usher 1.0700. A similar degree of correction in NZD is expected, initially targeting 0.8500.

Source: Westpac Global Markets

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