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Morning FX thoughts - 25 Nov'11

Westpac Global Markets Strategy Group

Friday 25th November 2011

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Sentiment remained depressed in thin trading markets on a US holiday.

German Chancellor Merkel again voiced her opposition to a Eurozone bond to bail out weaker members, and added that current EU treaty discussions are focussed on sanctions for fiscal violations and exclude matters relating to the ECB.

Disappointment that officials continue to tinker with the trivial rather than consider the bold pushed European equities and the EUR lower during the London afternoon. The German DAX index ground higher during the morning but then lost 2.9% to close down 0.5%.

Contributing to the move, Fitch downgraded Portugal from BBB- to BB+ with a negative outlook, and Standard & Poor’s warned Japan’s AA- rating was at risk given its high debt level.

US 3mth Libor nudged 0.5bp higher to 0.51% reflecting global funding pressures. Eurozone government bond yields rose, Portugal’s 10yr up 90bp, Greece +83bp (to a fresh high of 29.88%), Belgium +25bp, Italy +14bp, and even core Germany +5bp.

The US dollar index probed the previous day’s high. EUR initially firmed from 1.3355 to 1.3412 but slumped after lunch to 1.3316. A report the ECB was considering extending the maturity of its liquidity facility to three years was only briefly supportive.

USD/JPY sat inside a 77.00-77.23 range. AUD rose from 0.9704 to 0.9786 and then fell to 0.9702, following the EUR. NZD rose to 0.7456 and fell to 0.7394. AUD/NZD firmed slightly from 1.3085 to 1.3130.

AUD/USD and NZD/USD outlook next 24 hours: The immediate outlook is unchanged. 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. We remain bearish AUD/NZD, looking for 1.2800 during the weeks ahead, corrective bounces likely capped by 1.3140.


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