Morning FX thoughts - 04 Oct '11

Westpac Global Markets Strategy Group

Tuesday 4th October 2011

Europe continued to concern. Greece revealed it is likely to miss its deficit targets for the next two years and an IMF/EU/ECB decision on paying Greece the next tranche of its bailout may not be announced until 13 October.

The wider European debt crisis remains bereft of a clear solution, Germany quashing debate on boosting the Eurozone rescue fund at an EU finance ministers meeting until Slovakia, the Netherlands and Malta ratify an expansion to EUR 440bn.

Economic data was encouraging, manufacturing activity in the US, UK and Eurozone in September increasing and beating consensus, but markets were distracted by Europe.

The Eurostoxx 50 closed down 1.9%, and the S&P500 is currently down 2.0%, close to breaking below a technically important 1102 level.

The CRB commodities index is 0.5% lower, oil -1.4% and copper -1.6%. The US 10yr treasury yield is 12bp lower at 1.80%.

The US dollar index continued its strong run from September, up another 1% on the day. EUR made a nine-month low, falling from midday London’s 1.3381 to 1.3222. The yen again outperformed, USD/JPY falling from 77.10 to 76.51.

AUD made a fresh 10 month low 0.9552 a few hours ago after consolidating in London as high as 0.9673. NZD similarly fell from 0.7643 to 0.7537 – a six month low. AUD/NZD ranged narrowly around 1.2650.

AUD/USD and NZD/USD outlook next 24 hours: Momentum remains negative for both currencies. AUD has almost reached a major support level at 0.9540 and a break targets 0.9390 next. NZD is close to temporary support around 0.7500. The RBA meeting today risks dovish tones to push the AUD lower, while NZ business confidence and tonight’s Fonterra milk auction are unlikely to halt the NZD decline.

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