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Morning FX thoughts - 05 Oct '11

Westpac Global Markets Strategy Group

Wednesday 5th October 2011

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The mood remained sour. The London session responded to earlier news the decision on Greece’s next bailout tranche of EUR8bn would be delayed until later this month and the EU finance ministers’ meeting failed to advance discussion on enhancing the EFSF Eurozone bailout fund, as well as a profit downgrade by Germany’s Deutsche Bank and a possible restructuring of Dexia, Belgium’s largest bank, due partly to its Greek exposure. ECB head Trichet added he is against it financing the EFSF.

The NY session improved sentiment slightly after Fed chairman Bernanke told a Congressional committee it is prepared to take further action to boost growth.

The Eurostoxx 50 closed down 2.2%, while the S&&P500 is currently down 0.8%. The CRB commodities index is 0.9% lower, oil -1.9% (12-month low), copper 2.0% and gold -2.8% (bearish key day reversal signal).

US 10yr treasury yields are 1bp higher at 1.77% although did rise to 1.84% after Bernanke’s testimony. Eurozone peripherals Greece, Belgium and Hungary were sold, the 10yr yields up 49bp, 20bp, and 19bp respectively.

The US dollar index eked a fresh high in NY but looked consolidative rather than progressive. Outperformer on the day EUR bounced from 1.3146 to 1.3316, mainly on Bernanke, and settled around 1.3250. USD/JPY rose from 76.54 to 76.98.

AUD underperformed due to the RBA’s signal yesterday that rate cuts are possible, continuing its slide to 0.9388 – a fresh 12-month low. NZD briefly peeked below 0.7500 support to 0.7470, the overnight Fonterra auction milk price fall of 1.6% ignored by markets. After falling from 1.2630 post-RBA, AUD/NZD held around 1.2540.

AUD/USD and NZD/USD outlook next 24 hours: Momentum remains negative for both currencies although oversold conditions warn of a brief correction ahead. AUD may hold above 0.9390 support (Apr-10 peak), although Australian retail sales today should help the bears. NZD’s 0.7500 support level may hold today, but eventually the next target of 0.7350 should be see enroute to 0.7100 during the next few weeks.


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