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Morning FX thoughts - 29 Aug '11

Monday 29th August 2011

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After an initial sell-off, risk currencies and equities decided there was sufficient hope of further Federal Reserve monetary easing in Chairman Bernanke's Jackson Hole speech to warrant decent but not spectacular gains on the day. While certainly not stressing options such as further QE in the same manner as he did a year earlier, Bernanke did at least reiterate that "a range of tools" remained and that the next FOMC meeting would be extended to two days (20-21 Sep) to discuss the policy options in more detail.

This was enough to see the S&P 500 close up 1.5%, DJIA 135pts. AUD/USD sat around 1.0510 pre-speech, dipped to its NY session low of 1.0462 but then followed the equity recovery as high as 1.0593, heading into the weekend only 20 pips lower. It was a very similar story for NZD/USD, trading an 0.8317 to 0.8420 range, ending just above the figure.

USD/JPY saw its 76.50 session low right on the speech's delivery, bounced to a 77.07 high then returned to 76.65 in a curious performance. EUR/USD traded at 1.4445 just before Bernanke's headlines, sank as far as 1.4328 on the initial disappointment but then roared back to close at 1.4499, just 3 pips below its high. The latter came soon after ECB president Trichet's appearance in Wyoming in which he showed not the slightest dovish inclination.

Treasuries saw little net change but with some lively price action: the 10 year note rallied from 2.22% late Sydney to touch 2.12% as the speech hit the wires, but then squeezed back with the equity bounce to 2.21%, closing at 2.19%. Small revisions to US Q2 GDP and Aug consumer sentiment were overlooked. Commodities made healthy gains, the CRB +1%, Comex copper +0.5%, Brent crude oil +0.7% to $111.36/bbl and gold surging into the close, up about $50 to around $1828/oz.

Outlook: Markets will probably stick with a moderately upbeat view to start the week, aided by a quiet calendar. AUD/USD should aim for the 100 day moving average at 1.0644 and NZD/USD 0.8475, though we don't expect gains to be sustained over the course of the week.

Source: Westpac Global Markets Strategy Group



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