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Morning FX thoughts - 15 Aug '11

Monday 15th August 2011

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Risk sentiment stabilised. European and US equities rallied after a short-selling ban on financial shares was imposed in France, Italy, Spain, and Belgium.

The Eurostoxx 50 closed 4.2% higher, and the S&P500 marked a turnaround on the announcement, closing 0.5% higher. US data had less impact, a positive core retail sales surprise later offset by a dismal consumer confidence reading.

Commodities were mixed, oil down 0.4%, copper up 0.1%, silver up 1.0%, and gold down 1.0%.

US 10yr treasury yields fell from an intraday peak of 2.31% midday London to 2.22% after the US confidence report and then stabilised to close at 2.26%. Influential Fed dove Dudley revised down his expectations for the pace of US recovery as expected, while hawkish dissenter Kocherlakota  detailed his reasons for doing so, highlighting PCE inflation.

The US dollar index fluctuated sideways for little change. After being weighed down by a weak French GDP report, EUR bounced from 1.4150 after the short-selling ban to 1.4292 midday London, closing in NY little changed at 1.4248.

USD/JPY firmed from 76.51 (midday London) to 76.90, and opened there in NZ today. AUD turned around with the EUR after the Sydney close, climbing from 1.0246 to 1.0363, and opened this morning around 1.0345.

NZD similarly rose from 0.8181 to 0.8344, and has yet to trade this morning. AUD/NZD fell from 1.2535 to 1.2407 in an inverse response to risk sentiment.

AUD/USD and NZD/USD outlook next 24 hours: AUD continues to grind its way to 1.0400 major resistance, ensuing direction to be signalled by either a break or a repulsion. Similarly, NZD has major resistance at 0.8400 to overcome but looks less convincing. AUD/NZD is likely to continue consolidating between 1.2320 and 1.2630.

Westpac Global Markets Strategy Group

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