Morning FX thoughts - 10 Nov'11

Westpac Global Markets Strategy Group

Thursday 10th November 2011

Markets took another blow as political indecision in Greece and Italy continues. A near-agreement in the Greek parliament stalled on European Union demands for written commitments while uncertainty regarding a new political regime in Italy weighed more than the market desired event of Berlusconi’s resignation.

Low UK growth forecasts by CBI and warning of “lost decade” for the global economy by IMF chief Lagarde only aggravated the negative sentiments.

Asian markets which close early in the day were mostly in the green, riding on positive news such: Chinese inflation slowing by the most in almost 3 years which gives room to the policy makers for an expansionary measure and higher Australian consumer confidence.

Risk markets plunged amid the worries of Italian debt crisis. Italian 10 year yields are at unsustainable levels having touched a new high of 7.458% and have shot up by almost 160bps in last 2 weeks.

S&P 500 opened lower and is currently 2.6% down, Euro Stoxx 50 fell 2.5%, oil -2.0%, copper -1.2% while VIX volatility index has gapped up 4ppts.

Treasuries gained; US and German government 10 year bond yields are 13.56 and 18.2 bps down respectively as investors preferred safe havens. Gold is currently trading 0.7% lower.

The US dollar index sharply increased by 1.5% on the back of risk aversion. Euro, AUD and NZD opened near yesterday’s close, then plunged by about 2% and are currently trading close to intra-day lows.

Euro seemed resilient in early London trades touching high of 1.3859, but then pared gains to trade near intra-day low of 1.3553.

AUD followed similar path, with intra-day high of 1.0398 and then falling to 1.0154 level, early NY time. NZD movement also seemed to be synchronized with a high of 0.7987 and then touching the low of 0.7821.

JPY is trading in the band of 77.79 – 77.54 levels, currently at 77.73. AUD/NZD had touched high of 1.3037 but dropped about 0.4% from the high and is at 1.2980.

AUD/USD and NZD/USD outlook next 24 hours: Australian employment data, New Zealand business PMI and consumer confidence will hold key for early rate movements. Later on in the day better than expected US jobless claims data may boost the market risk sentiments amid re-emergence of European volatility. We nonetheless see the bearish view to continue and AUD and NZD may test the recent pivots 1.0071 and 0.7806 respectively. Market will desperately look for positive cues from Europe’s growth forecast. Barring any big surprises, we see the rates capped at 1.0280 and 0.7920 for today.

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