Morning FX thoughts - 26 Sept '11

Westpac Global Markets Strategy Group

Monday 26th September 2011

Soothing sounds from the policymakers. A range of comments from European officials suggested a policy response may be nearer, and a Telegraph (UK) report said German and French authorities had begun work on a multi-trillion euro plan to step up bank recapitalisation, leverage the EFSF bailout fund to EUR1-2tr and manage a Greek default inflicting 50% losses on debt-holders. In addition, ECB head Trichet said it was ready to supply unlimited liquidity and member Noyer implied an interest rate cut was possible.

The G20/IMF/World Bank meeting’s communiqué and press conferences in Washington were consistent with all this but provided no specifics. The 3 Oct EU meeting will discuss EFSF leverage, and the 3 Nov G20 meeting may reveal more on the overall plan. Markets will remain sceptical given the regulatory and political hurdles to such a plan, but there was enough to halt the decline in risk appetite, with the S&P500 recovering from midday London to close up 0.6%. Commodities fell 1.8% (oil -0.8%, copper -6.0%, silver -13.2%, gold -4.8%) in possibly a lagged reaction to the recent decline in risk appetite. US 10yr treasury yields bounced from a fresh 65-year low of 1.67% to 1.84%.

The US dollar index ranged sideways. EUR dipped to 1.3520 before the supportive news above, rebounding to 1.3545 and ranging thereafter. USD/JPY rose from 76.15 to 76.89 and settled around 76.60. AUD initially dipped from 0.9867 to 0.9669 (a post-Dec 10 low) but followed the sentiment rebound from midday London to 0.9847 and then consolidated around 0.9880. NZD similarly rebounded from 0.7724 to 0.7853 but sagged to 0.7729 near the close for the day’s underperformance. AUD/NZD rose from 1.2510 to 1.2620.

AUD/USD and NZD/USD outlook next 24 hours: The positive European comments should support sentiment today. AUD should continue a corrective bounce to at least 0.9930. Similarly, NZD could bounce to 0.7925 today. NZ’s trade balance is a minor market-mover.

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