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Morning FX thoughts - 13 Sept '11

Westpac Global Markets Strategy Group

Tuesday 13th September 2011

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Europe was again the dominant contributor to a pessimistic tone to global markets.

A Greek debt default remains the base case for markets (Greek 10yr government bond yields rose 299bp to 23.54% and credit default swaps imply a 98% chance of default within five years) and increasingly, officials. A German government adviser confirmed a Greek restructuring was indeed being discussed.German Finance Minister Schaueble separately talked tough, saying Greece needs to either shape up regarding reforms or consider “other” possibilities.

Adding to the negative mood, the European Commission said Europe’s recovery remained fragile and sovereign debt levels will probably keep rising, and Moody’s should announce this week whether it downgrades major French banks due to their Greek exposures.

The Eurostoxx 50 closed down 3.8% while the S&P500 is currently down 1.1%. The CRB commodities index is unchanged, largely due to oil’s curious +1.2% gain offsetting the likes of copper (-0.5%), gold (-2.4%), and silver (--3.3%).

The US 10yr treasury yield is unchanged at 1.92% although it did make a fresh low of 1.88% in London. An advisory report suggested the Fed would soon cut the interest rate paid on reserves to zero in addition to switching from short to long maturity treasury bonds, but the story’s effect was brief and minor.

The US dollar index held yesterday’s Sydney session gains to a post-Feb high. EUR firmed to 1.3694 in London but slumped to 1.3556 in NY, Schaueble’s comments in particular weighing. USD/JPY rose from 76.76 to 77.39, safe-haven yen the day’s outperformer.

AUD followed the EUR, initially staging a trivial recovery from 1.0276 to 1.0383, but then falling to a 12 August low of 1.0256 in the underperformance (among majors) of the day. NZD rose from 0.8119 to 0.8240 before falling to 0.8160. AUD/NZD continued its multi-day decline to 1.2550.

AUD/USD and NZD/USD outlook next 24 hours: AUD momentum remains negative and any 1.0480 remains major resistance above. A minor corrective bounce is possible today, given its stretched intraday state. NAB business confidence is released today. NZD should remain below 0.8220 today and targets at least 0.8000 during the week ahead. NZ data on house prices, food prices and manufacturing activity presents only minor event risk.


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