Morning FX thoughts - 17 Oct '11

Westpac Global Markets Strategy Group

Monday 17th October 2011

Risk rallies extend. The risk-seeking atmosphere, which started on 4 October, continued on Friday amid expectations a grand plan to address the European debt crisis would soon be unveiled. The G20 meeting of finance ministers concluded on Saturday, noting substantial steps would be taken at the European Council meeting on 23 October and an action plan would be presented formally to the G20 leaders’ summit on 3 November.

The main elements to such a plan appear to be an EFSF expansion, European bank recapitalisation, Greek solvency, and amendments to the European Treaty to tighten future economic management. Italy’s leader survived a confidence vote, adding to the positive market tone.

The Eurostoxx 50 closed up 1.0%, and the S&P500 closed up 1.7%. The CRB commodities index closed 2% higher (oil +3.1%, copper +3.1%).

US data was initially supportive, retail sales beating both previous and consensus values, although consumer confidence later disappointed. US treasury yields rose from the Sydney closing level of 2.20% to 2.26% post-retail sales and consolidated thereafter.

The US dollar index fell to a fresh one-month low. EUR rose from 1.3744 to 1.3894 by early NY and consolidated thereafter to close at 1.3882. Safe-haven yen underperformed, USD/JPY rising from 76.87 to 77.45 and closing at 77.22.

Outperformer AUD rose from an early London 1.0177 to 1.0346 – a one-month high – and closed around there. NZD rose from 0.7932 to 0.8057. AUD/NZD pushed a little higher, from 1.2820 to 1.2870.

AUD/USD and NZD/USD outlook next 24 hours: AUD looks stretched near-term and needs a pullback to at least 1.0230 today. NZD similarly should slip to at least 0.8000, but probably closer to 0.7900. There is little data to watch today, save Australian car sales.

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