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Morning FX thoughts - 1 Dec '11

Westpac Global Markets Strategy Group

Thursday 1st December 2011

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A surprise coordinated move by central banks to provide cheaper liquidity boosted risk markets.

The central banks of the US, EZ, Japan, UK, Switzerland and Canada agreed to provide USD funding via swaps at OIS+50bp, 50bp lower than previously, and extend the program by six months to February 2013 in a move designed to ease stresses in financial markets, particularly funding channels to European banks.

There was also supportive news from China, which cut its bank reserve requirements ratio by 50bp – the first cut since 2008. And in the US, ADP (private sector) employment data posted a large positive surprise.

The above jolted markets from around midday London, the S&P500 currently up 3.5%. The CRB commodities index is up 1.5%, oil +1.3%, copper +5.6%, and gold +1.9%. US 10yr treasury yields are 6bp higher at 2.05%, having reached 2.11% after the above news, and 3mth Eurodollar yields (front futures) are around 16bp lower. Eurozone peripheral bond yields fell, apart from Portugal (+45bp).

The US dollar index lost almost 1% after the central banks’ announcement. EUR surged from 1.3300 to 1.3533 but then drifted lower to 1.3430. USD/JPY fell from 78.16 to 77.30 and then settled around 77.60. AUD was initially boosted by the China news, from 0.9975 to 1.0075, the central bank news then taking it to 1.0328. NZD rose from 0.7600 to 0.7823. AUD/NZD spiked to 1.3240 before probing 1.3170.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s corrective rally to 1.0338 has now retraced 62% of the month-long decline although momentum could take it slightly further to resistance at 1.0350. NZD has retraced around 50% and could push further to 0.7910. AUD/NZD’s 18 Nov peak of 1.3270 should remain intact.


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