Morning FX thoughts - 06 Oct '11

Westpac Global Markets Strategy Group

Thursday 6th October 2011

Hope that European discussions on a coordinated approach to bank recapitalisation may advance kept risk markets underpinned.

Although an EU official said there are no concrete plans yet, German Chancellor Merkel said the government was ready to recapitalise banks if needed.

Yesterday’s downgrade of Italy by Moody’s appeared to have little residual impact, the agency adding it saw no immediate pressures on the existing Aaa ratings, suggesting core Europe’s safe haven status remains intact for now.

The Eurostoxx 50 closed up 4.2%, and the S&P500 is currently up 1.0%. The CRB commodities index bounced 1.8% from an oversold condition, oil +4.7%, copper +0.5%, and gold +1.0%. US 10yr treasury yields are 8bp higher at 1.91%, while 2yr yields are unchanged.

The US dollar index ranged sideways in London and NY, but appears to be in corrective mode from an overbought state. EUR did the reverse in a 1.3277-1.3375 range, testing the upside as we write.

The IMF opined the ECB should ease policy, and markets are predicting an 80% chance of such tonight.

USD/JPY spiked from 76.64 to 77.07 during the NY morning but is back to 76.75. Outperformer AUD extended its Sydney afternoon rally from 0.9550 to 0.9665 currently, perhaps aided by yesterday’s strong retail sales report. NZD ranged around 0.7600 until Ny when it broke up to 0.7670. AUD/NZD rose from 1.2530 to 1.2630 and settled at 1.2600.

AUD/USD and NZD/USD outlook next 24 hours: A corrective bounce from oversold conditions may be in progress. AUD’s minimum target is 0.9715, while NZD’s is 0.7730 although up to 0.7960 is possible. We still expect much lower for both over the remainder of the year, though. Tonight’s ECB meeting, and to a lesser extent the BOE, should have some impact regardless of the decisions.

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