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Morning FX thoughts - 27 Oct '11

Westpac Global Markets Strategy Group

Thursday 27th October 2011

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Pre-summit volatility. Markets gyrated ahead of the key EU summit on Eurozone’s rescue which is scheduled to conclude within the next few hours.

Risk sentiment improved until early NY as Germany’s parliament approved leveraging the EFSF and some consensus beating US data (durable goods, new home sales) was released. Then reports that talks on Greek haircuts reached a deadlock and were suspended, and that the targeted level of the EFSF would probably not be revealed until late November, dampened the mood.

More recently, a report that China has agreed to invest in the EFSF revived sentiment, and some content from the EU summit draft is trickling out. There is little detail apart from a planned several fold increase in the EFSF and its likely structure (insurance and a special purpose vehicle).

The S&P500 has recovered from -0.6% to be +0.8% currently. Commodities are mixed, oil -2.0% on larger inventories, while copper is +2.0% on expectations China will ease monetary conditions, and gold is +0.9%.

US10yr treasury yields are 8bp higher at 2.18%. The 5yr auction was strong at 1bp lower than market yield, 2.9 bid-cover (2.8 average) and 49% offshore bids (40% average).

The US dollar index ranged widely between 75.9 and 76.65 but is little changed as we write. EUR fell from an early NY peak of 1.3975 to 1.3799 but recovered to 1.3915. USD/JPY briefly dipped to a fresh low of 75.72 during London but otherwise ranged sideways around 76.00. AUD made an overnight low of 1.0322 during early NY but recovered to 1.0400. Influential columnist Terry McCrann wrote the RBA will ease on Melbourne Cup Day in November.

NZD fell to 0.7914 and recovered to 0.7963. AUD/NZD recovered from a 1.3000 base to 1.3074.

AUD/USD and NZD/USD outlook next 24 hours: The EU summit outcome released shortly will be the dominant influence today. There is strong support for AUD around 1.0350 and a push towards the recent 1.0500 high is possible.  NZD could bounce to the 0.7990-0.8010 area today. AUD/NZD is overbought and targets 1.2950 during the next day or two. The RBNZ's OCR Review is expected to deliver a market-neutral statement.


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