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Morning FX thoughts - 8 Nov'11

Westpac Global Markets Strategy Group

Tuesday 8th November 2011

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FX markets held within familiar ranges overnight despite a slew of negatives swirling Europe. Early reports that Italian PM Berlusconi was about to resign ahead of a crucial confidence vote tomorrow aided Eurozone stocks and helped contain the downside for EUR/USD but he denied the reports sending EUR/USD down from 1.3765 to lows near 1.3680 just head of the NY open.

A much larger than expected 2.7% fall in September German industrial production (vs consensus at -0.9%) also weighed on sentiment as did comments from the ECB's Mersch over the weekend that the ECB has discussed ending crucial Italian bond purchases if the Italian government does not stick to its reform plans.

EUR however managed to claw back losses trading back to 1.3750 into the NY session with no clear catalyst. Italian 10yr bond yields rose above 6.60% for the first time in the euro era, despite ECB buying as uncertainty about PM Berlusconi's future, concern about Italian/European growth prospects and doubts about the country's ability to meet deficit reduction targets heightened fears that Italy might cease to be able to afford to fund itself.

Greek 2 year bond yields surged 713bp to 105.1% despite confirmation that a new unity government is take charge in Greece.

AUD and NZD traded lower in European dealings in sympathy with the weaker EUR but stabilised in the US session. AUD/USD shed about 1c falling to 1.0280 before rallying back to 1.0350. NZD/USD held a rough 0.7920 - 0.8000 range overnight.

The Dow Jones and the S&P were both down 0.5% in late US dealings while copper is 0.9% lower. Gold benefited from the uncertainty rising $31/oz to $1786/oz. The 10 year Treasury note rallied from 2.06% early London to 1.97% in the uneasy global mood.

The Australian calendar includes the Sep trade balance. Westpac expects a record surplus of AUD3.4bn vs consensus at AUD3bn. The October NAB business survey is also scheduled for release today. There is no NZ data on tap today.

The key event in the day ahead is a vote scheduled in the Italian Parliament to rubber stamp last year's budget. Berlusconi is struggling to maintain a majority amid key defections from his coalition . The outcome of the confidence vote on the budget measures will reveal whether Berlusconi still has a majority.

Both AUD and NZD have taken on a consolidative tone of late but should break lower in coming days. NZD/USD should be capped into 0.8000/30 while AUD/USD should meet sellers in the low/mid-1.04s.


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