Morning FX thoughts - 22 Sept '11

Westpac Global Markets Strategy Group

Thursday 22nd September 2011

Risk markets drooped ahead of the US central bank’s meeting and then fell further in response.

The FOMC statement announced a fresh, but widely anticipated, measure to stimulate the economy by pushing down long-term lending rates: the Fed will sell treasuries in its portfolio with maturities under 3 years and reinvest the proceeds in maturities between 6 and 30 years. The total size of the operation, which will run until June 2012, is $400b – slightly higher than markets anticipated.

The US treasury market responded by immediately pushing 3yr yields 5bp higher and 30yr yields 16bp lower. The 10yr yield fell 8bp to 1.85% - a record low.

The S&P500 is currently down 2.1%, noting the Fed’s downgraded economic outlook in the statement. The index was increasingly under water from the NY open on a continuing pessimistic outlook on Europe as well as Moody’s downgrades of Bank of America and Wells Fargo, citing a lower chance of government support if needed.

The US dollar index bounced from 76.8 to 77.6 in response to the FOMC statement, partly due to the negative reaction by equity markets but also possibly due to the Fed refraining from cutting interest rates on reserves or expanding its balance sheet further.

EUR rose from 1.3629 to 1.3797 pre-FOMC amid Greek agreement to austerity measures but then plunged to 1.3604 after the statement.

USD/JPY bounced from 76.30 to 76.66. AUD ground lower pre-FOMC from 1.0285 to 1.0185, plunging to 1.0062 (fresh one-month low) in response.

NZD fell from 0.8235 to 0.8131 pre-FOMC, extending that to 0.8005 as we write. AUD/NZD rose from 1.2450 to 1.2580 during the NY session.

Contrasting speeches from the RBNZ Governor (the OCR increase “could take time”) and the RBA Deputy Governor in NY (it’s similar to 2003 – the markets priced rate cuts which never came) were cross-supportive.

AUD/USD and NZD/USD outlook next 24 hours: The AUD has broken lower and next major support is not until 0.9930. Today’s China PMI report (HSBC version) may have an impact. NZD has similarly broken down and is heading to major support at 0.7965. Today’s NZ risk events are Q2 GDP (Westpac forecasts +0.7%, market consensus is +0.5%), and Fonterra’s annual results which include an update on 2011 and 2012 milk payout forecasts.

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