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Morning FX thoughts - 27 July '11

Wednesday 27th July 2011

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The main theme last night was US dollar weakness. The cause was a lack of advance from the US debt negotiation stalemate which has existed for the past few weeks.

The most promising comments came from Senate majority leader Reid (Dem) who said he’s open to compromises regarding deficit reduction. That helped the S&P500 recover from 0.6% down to only 0.1% down as we write. Commodities (CRB index) are up 0.8%, mainly because the US dollar is weaker, copper gapping 1.7% higher helped by a large Chilean mine strike, US 10yr treasury yields are 5bp lower at 2.95%, relatively unfazed by the lack of debt ceiling progress. The 2yr auction went well enough, given the backdrop, awarded at the market yield, with slightly sub-average 3.1 bid-cover ratio.

The US dollar index broke below the key 74.00 level to 73.45 – a 5 May low. The next target is 72.70. EUR broke above a mujlti-month descending channel at 1.4430 and reached 1.4526 with bullish implications for the days ahead. GBP surged after a Q2 GDP outturn of 0.2% - on consensus but allaying fears of a negative print. USD/JPY continued lower despite intervention concerns, making a four month low at 77.83. AUD outperformed most in the wake of RBA Governor Stevens’ speech yesterday, making a three month high at 1.0969.

NZD recorded a fresh record high of 0.8743 around midday London. AUD/NZD continued to consolidate above the recent low between 1.2520 and 1.2580.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s push towards a fresh record high continues, although an overbought condition on hourly charts suggests a brief correction to 1.0875 today. Today’s Australian CPI release is usually a major market-mover, a 0.7% reading probably neutral. NZD could advance further today is NBNZ business confidence flags inflation risks, corrections contained by 0.8600.

Source: Westpac Global Markets

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