Morning FX thoughts - 26 Aug '11

Friday 26th August 2011

Markets were nervous ahead of tomorrow’s Fed conference at Jackson Hole. The S&P500 is currently down 1.5% and the VIX barometer of risk aversion is 3ppts higher.

Bearish factors included waning expectations Jackson Hole will signal any meaningful stimulus, a weak US jobless claims report, a potentially devastating hurricane off NY city, rumours of a German downgrade (all three agencies later reaffirmed its AAA rating), and rumours Germany may ban short-selling (also denied by officials). Warren Buffet’s $5b investment in Bank of America caused a 1.5% spike pre-open but it only lasted 23 minutes.

The CRB commodities index is barely changed, as is oil, although copper is up 2.2% on a bullish outlook from Glencore (world’s largest commodities trader).

The US 10yr treasury yield is 7bp lower at 2.23%. A 7yr auction went well enough at 1bp above market yield, slightly sub-average 2.8 bid-cover ratio, and a strong 52% offshore interest. Greek 2yr and 10yr bond yields made fresh record highs.

The US dollar index is slightly firmer. EUR fell from 1.4475 to 1.4328 and settled at 1.4375 in NY. USD/JPY broke higher, from 77.00 to 77.70. AUD again gyrated with equities, peaking at 1.0513 early NY and then slumping to 1.0425. NZD similarly bounced to 0.8330 and then fell to 0.8265. AUD/NZD ground lower to 1.2570.

AUD/USD and NZD/USD outlook next 24 hours: Markets will likely remain nervous ahead of tonight's Jackson Hole conference. AUD is breaking lower, the immediate targets 1.0390 and then 1.0315. RBA Governor Stevens speaks to Parliament this morning and markets will watch closely. NZD targets 0.8215 next.

Source: Westpac Global Markets Strategy Group

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