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Morning FX thoughts - 7 Sept '11

Westpac Global Markets Strategy Group

Wednesday 7th September 2011

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Offshore markets exhibited more volatility overnight, with AUDUSD and NZDUSD weakening into the New York close.

London markets opened with a continuation of EURUSD and euro cross selling quickly being met with buyers looking to scoop it up at the relatively low levels. EURUSD reached a low of 1.4043 in the pre-session trading. Credit spreads, which have widened since July, took a breather at the beginning of the London session in anticipation of the US opening after its Labor Day holiday.

Light liquidity meant that markets reacted strongly on the news that the Swiss National Bank would target a minimum of 1.20 ERUCHF, would ‘no longer tolerate’ a lower exchange rate, and would ‘enforce this minimum rate with the utmost determination’. EURCHF, trading at a low of 1.1019 pre the announcement, quickly moved higher through 1.20 to settle for the remainder of the day around 1.2030-40. This surprise announcement pulled all euro crosses higher – EURAUD moved from 1.3350 to 1.3450, settling at 1.34 until the US market opened – but softened later in the day.

Further consternation surrounding the European sovereign crisis continued including false rumours of Greece’s exit of the Eurozone, meant that New York picked up on this trend pushing EURUSD lower throughout the session, breaking the 1.4007 200day moving average and briefly dipping through 1.40.  European credit spreads widened, the S&P500 fell 2%, US 10year Treasury yields fell to 1.9261%, and the Dollar Index traded with a bid tone.

The New Zealand Dollar underperformed over the day, confirmed by softer Fonterra milk auction (the all contracts trade weighted index fell 1.4%). NZDUSD reached an intraday low of 0.8211 and closing only slightly higher a t0.8215. By contrast, the AUDUSD performed better, but still ending the day lower at 1.0490. The AUDNZD, therefore, appreciated throughout the day to close at 1.2770.


With no NZ data on the horizon and little due for release this week, the NZ Dollar will follow the AUD and the general US Dollar trend. Australian GDP is due for release today, with risks to the upside (market expectations for 1.0% Q2 qoq, Westpac at 1.3%). Any selling into the GDP figure is likely to be met with support at 1.0371 (200day moving average), with 1.06 topside target on a better than expected number. There is a pivot point in the AUDNZD cross at 1.2800, which may act as light resistance but will give way if Australian GDP is strong.


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