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Morning FX thoughts - 28 Nov'11

Westpac Global Markets Strategy Group

Monday 28th November 2011

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Markets remained in a pessimistic mood on Friday, European headlines mostly market-unfriendly.

Belgium’s credit rating was cut by Standard & Poor’s from AA+ to AA, its bailout of Dexia and factious politics cited. Greece reportedly changed its demand for debt writeoffs from around 50% to around 75%, unlikely to incentivise voluntary participation (and avoid a credit event).

The FT reported EFSF fundraising may fall short of EUR 1tr due to deteriorating market conditions. And Italy’s auctions of 6mth and 2yr debt went poorly, the tbills yielding 6.50% compared to 3.5% a month ago. Its 10yr bonds rose as much as 26bp to 7.37% in the secondary market.

It wasn’t one-way market traffic though, German comments that private participation in future rescues via the ESM fund may be lightened. After markets closed, La Stampa reported that the IMF is preparing a EUR 600bn loan for Italy, which would cover the country’s financing needs for the next year.

The S&P500 closed 0.3% lower in an illiquid session, and the CRB commodities index closed down 0.4%. US 10yr treasury yields rose from 1.88% (pre-holiday) to 1.97%.

The US dollar index rose to a two-month high. EUR fell from 1.3323 to 1.3212 by the NY open, then spiking briefly to 1.3298. USD/JPY rose from 77.33 to 99.79. AUD probed the recent low around 0.9668 before NY opened, then squeezing to 0.9773 with equities before closing at 0.9711.

NZD similarly squeezed from 0.7371 to 0.7442 and closed at 0.7405. AUD/NZD firmed from 1.3080 to 1.3140.

AUD/USD and NZD/USD outlook next 24 hours: The IMF/Italy news, if true, should give risk appetite a decent boost today. AUD could stage a corrective bounce to 0.9865, although the multi-week outlook remains negative. NZD should bounce, too, but 0.7640 is a hurdle. The NZ general election saw the National party return for a second term, in line with expectations, and is unlikely to have market impact. A bullish outside day signals a day or two of AUD/NZD strength to the 1.3170-90 area.


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