Morning FX thoughts - 24 Nov'11

Westpac Global Markets Strategy Group

Thursday 24th November 2011

Risk markets lower. The negative sentiment prevailing during yesterday’s domestic session extended last night in NY.

Yesterday’s news the Fed has asked US banks to stress test for a systemic European crisis and the weak China PMI was supplemented by a poor German 10yr government bond auction which was less than fully subscribed. The result disturbed the prior belief that German bonds are true safe havens and indicates the spread of the Eurozone crisis from the peripherals to the core.

The peripherals saw further selling, Greece’s yield up 28bp to a fresh EUR-era record of 29.15%, Belgium +41bp to a post-2000 high, and Italy and France +15bp.

The S&P500 is currently down 1.6%, while the CRB commodities index is down 1.2% (oil -1.7%, copper -2.3%, silver -2.4%). US 10yr treasury yields are down 2bp at 1.90%, the overnight range 1.88%-1.96%. A 7yr auction went well.

The US dollar index surged to a six-week high. EUR broke below a five-day range, falling from 1.3480 to 1.3327. Eurozone PMI data for November were at levels consistent with a return to recession. USD/JPY rose from 76.96 to 77.58. AUD extended its domestic session decline to 0.9664, ignoring strong construction data. NZD fell from 0.7470 to 0.7386. AUD/NZD broke lower, from 1.3160 to 1.3075, illustrating its currently pro-risk characteristic.

AUD/USD and NZD/USD outlook next 24 hours: AUD remains on track to test the 0.9390 low made on 4 Oct during the days ahead, any corrective bounces capped by 0.9810. NZD similarly is destined for 0.7120, bounces likely capped by 0.7460. NZ’s trade balance report today will probably be ignored.

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