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Morning FX thoughts - 29 Nov'11

Westpac Global Markets Strategy Group

Tuesday 29th November 2011

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Risk sentiment bounced on the good rumours. The stories coming from Europe since the weekend have generally been positive, even if much is unsubstantiated, and that appears to be fuelling hopes that policymakers are nearing a final solution.

The IMF officially denied that Italy had requested funding, but a German newspaper Welt am Sontag wrote that the AAA Eurozone countries are considering a joint bond program to help stabilise the wider Eurozone’s debt markets (later denied by the German FM). It also said leaders Merkel and Sarkozy are discussing an agreement for tighter fiscal discipline in future which doesn’t require treaty changes.

The Belgian 10yr bond auction went well at a 2.6 bid-cover ratio (vs 1.7 previously), although it had to pay 5.66% for the money (vs 4.37%).

US Thanksgiving Day retail sales, up 16% yoy, also helped market sentiment. The S&P500 is currently up 3.0%, and has formed a bullish key day reversal.

The CRB commodities index is up 0.5%, oil +0.5%, copper +3.0% and gold +1.6%. US 10yr treasury bond yields are 3bp higher at 2.00% having touched 2.08% early NY. Among the EZ peripherals, Greece (+103bp to a fresh high of 30.90%) and Portugal (+81bp to a fresh high of 13.45%) remained unloved.

The US dollar index retreated amid the better risk sentiment. EUR bounced from 1.3273 to 1.3399 during the London morning but slipped to 1.3307 in NY. USD/JPY extended its rally from 77.60 to 78.24. AUD rose from 0.9834 to 0.9976 before slipping to 0.9886 a few hours ago. NZD ground higher to 0.7575 before settling above 0.7537. AUD/NZD rose from 1.3080 to 1.3180.

AUD/USD and NZD/USD outlook next 24 hours: AUD appears to be correcting the month-long decline, the target window for this bounce 0.9920-1.0335. The NZD’s target window is 0.7575-0.7910. Today’s main event is the Eurozone finance ministers’ meeting in Brussels, a potential source of headlines on the debt crisis tonight.


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