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Morning FX thoughts - 5 Aug '11

Friday 5th August 2011

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Fear gripped the markets during the London and NY sessions as concerns about US economic growth intensified.

There was little data of importance, although two central banks did meet – the ECB and BOE kept rates unchanged as expected, the former’s President saying it has resumed bond purchases and will provide more liquidity. Those comments were only market-supportive for about an hour around midday London, the rout continuing thereafter.

The S&P500 is currently down 3.8%, technical indicators predicting a move to at least 1150 during the week ahead. The VIX barometer of risk aversion spiked 5ppts to 29 – a post-March high. European bourses took 3-4% losses. Commodities also fared poorly, the CRB index down 2.8%, with oil -5.4%, copper -2.1%, silver -6.3% and even gold -0.4%. US 10yr treasury yields plunged 17bp to 2.45% as investors flocked to safety.

The US dollar index benefitted from the widespread risk version, surging around 1.5% and forming a technically bullish key day reversal.

EUR did the opposite, falling from 1.4330 to 1.4111, good German factory data ignored.

USD/JPY continued to rise after the BOJ intervention yesterday, more of such suspected during the late Asian and London sessions to take the pair to 80.24 during the London morning. It slipped after that to 79.00.

AUD continued its slide with little interruption, from 1.0690 to 1.0495. NZD stalled until midday London when it fell from 0.8540 to 0.8400. AUD/NZD gyrated wildly in a sideways direction between 1.2400 and 1.2550.

AUD/USD and NZD/USD outlook next 24 hours: AUD broke major trend support (from late June) at 1.0700 and now targets 1.0400. Today’s RBA Statement on Monetary Policy will be important given the market’s surprise at last Tuesday’s outcome. NZD targets 0.78-0.82 during this correction but should find minor support today at 0.8380.

Source: Westpac Global Markets Strategy Group

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