Morning FX thoughts - 1 Aug '11

Monday 1st August 2011

Weak US data and further wrangling over the US debt ceiling contributed to a selloff in equities, commodities and the US dollar, as well as a fall in US treasury yields.

Moody’s placement of Spain’s Aa2 rating on review for a possible downgrade also hurt risk sentiment.

US Q2 GDP was weaker than expected and Q4 and Q1 were revised sharply lower. US equities were already under water as a result of the US debt impasse, the data helping the S&P500 close down 0.7%.

The VIX barometer of risk aversion spiked to 25.9 – a post-March high.

The CRB commodities index closed down 0.8%, oil -1.8%.

US 10yr treasury yields plunged from 2.95% to 2.77% during London and NY, partly due to the weak data but also due to some expectation of debt ceiling progress during the weekend. The House did pass a bill but the Senate rejected it. Leaders later expressed confidence a resolution would be reached before Tuesday.

The US dollar index plunged after the weak US GP print, forming a technically bearish key reversal day.

EUR did the opposite, rising from 1.4230 mid-morning London to 1.4413 in NY.

The yen outperformed, USD/JPY falling from 77.67 to 76.73.

AUD was weighed by US equity weakness, making an intraday low at 1.0911 around midday London, before the USD’s plunge forced it up to 1.1019.

NZD similarly made an intraday low of 0.8622 before surging to a fresh record high at 0.8800. AUD/NZD fell from 1.2650 to 1.2500.

AUD/USD and NZD/USD outlook next 24 hours: Speculation that a US debt ceiling agreement will be reached today is supporting both the US dollar and risk sentiment at this morning’s NZ open.

Australia is on holiday today, thinning AUD trading, but it should make a fresh high today after completing a (shallow) correction on Friday. NZD’s correction was similarly shallow, but clears the way to a fresh high today.

Source: Westpac Global Markets

Comments from our readers

No comments yet