Morning FX thoughts - 14 Dec '11

Westpac Global Markets Strategy Group

Wednesday 14th December 2011

Pre-FOMC calm. Most major markets consolidated ahead of the US central bank meeting. There was minor news to jostle prices, though.

The Spanish auction of 12 and 18 month bills raised EUR4.9bn, moiré than the 4.3bn targeted, and yields were lower than previously, helping wider risk sentiment.

Germany’s business confidence survey posted an unexpected bounce, although it still remains depressed. Negative news came from Germany’s Merkel who rejected an increase in the limit of the permanent ESM bailout facility from EUR500bn, and US retail sales were weak.

The S&P500 is currently up 0.5%, while the CRB commodities index is up 0.9%. US 10yr treasury yields are 3bp higher at 2.04%, earlier as high as 2.06%. The 10yr auction saw very strong offshore demand, the awarded yield 1.5bp below market and the bid-cover ratio of 3.5 well above the 3.1 average. Most European peripheral yields fell slightly, the exceptions being the Greek 10yr (+51bp to 34.98%) and Italy (+12bp to 6.69%).

The US dollar index hardly moved in London but rose by around 0.9% after the Merkel comments to a post-Jan high of 80.13. EUR did the same in reverse, stuck between 1.3166 and 1.3237 until the comments pushed it down to 1.3057.

USD/JPY fluctuated between 77.64 and 77.95. AUD rose from 1.0070 to 1.0163 in London and followed the EUR lower to 1.0055 in NY. NZD rose from 0.7623 to 0.7675 and then reversed to 0.7612. AUD/NZD followed risk sentiment from 1.3200 to 1.3240 and back to 1.3210.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s momentum is currently negative and a push below the previous day’s low of 1.0030 is expected today. NZD continues to gravitate towards trend support (dating from May 2010) at 0.7590, a break then pointing to 0.7470. In Australia, RBA Deputy Governor Battellino speaks in Sydney, and Westpac’s consumer confidence report is released today.

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