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Morning FX thoughts - 13 Dec '11

Westpac Global Markets Strategy Group

Tuesday 13th December 2011

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Rating agencies less than impressed. The positive tone created by Friday’s EU Summit lasted all of 24 hours, rating agency Moody’s assessing policymakers as having failed to produce decisive measures to end the crisis.

It sees the EU remaining prone to further shocks and will review all EU countries during Q1 2012. Fitch chimed in during NY, saying the Summit did not offer a comprehensive solution to the crisis.

Private sector analysts also reviewed the Summit in a negative light, the most common criticisms being the delay in implementation (6-9mths), a requirement for constitutional change in some countries, the likelihood some will miss the deficit targets, and no centralised surveillance.

The S&P500 slid throughout London and NY and is currently 2.1% down. Commodities are lower, gold’s -2.7% (a two month low of $1658) notable amid chatter some stressed banks are selling the metal to raise cash.

Funding spreads, such as Libor-OIS, rose further. US 10yr treasury yields are 5bp lower at 2.00%, while the 3yr auction was strong. The Italian 10yr government yield rose 20bp to 6.56%.

The US dollar index surged at the London open and is 1.1% higher at 79.49. EUR started the London session at 1.3357 but the Moody’s news helped it break down below a major trend support level dating from August 2010 at 1.3233, reaching 1.3178.

USD/JPY rose from 77.60 to 78.00. AUD fell from early London’s 1.0189 to 1.0052. NZD fell from 0.7730 to 0.7611. AUD/NZD switched to a negative beta, rising from 1.3170 to 1.3220.

AUD/USD and NZD/USD outlook next 24 hours: After a false start, AUD’s downside break of 1.0150 on Friday has been validated and a move to the next congestion target at 1.0000 is expected today. For NZD, there is trend support (dating from May 2010) at 0.7590, a break then pointing to 0.7470. Australia has housing starts and a business confidence survey to watch today, while tonight’s US central bank meeting is unlikely to surprise.


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