Morning FX thoughts - 6 Sept '11

Westpac Global Markets Strategy Group

Tuesday 6th September 2011

The follow through from Friday’s disappointing US non-farm payrolls continued into the start of the week, with little in the way of positive news coming out of Europe over the weekend to help provide a bid to risk assets and US Labour Day holiday meaning liquidity was scarce.

Peripheral spreads widened out sharply with 10yr Italian bonds out 57bp versus Germany while Spanish bonds widened 23bp, despite reports of the ECB purchasing both Italian and Spanish government debt during the morning via the SMP facility. German 10yr yields closed at a record low of 1.86% (-15bp) despite an upward revision to the August German PMI services (51.1 from 50.4) while 10yr UK Gilts fell a similar amount to 2.30% after the second largest drop ever in the Services PMI (51.1 from 55.4) fuelled expectations that the Bank of England will be forced to implement another round of asset purchases, possibly as early as this Thursday's MPC meeting.

European equities suffered sharp losses (FTSE 100 -3.60%/Eurostoxx 50 -4.8%/DAX -5.0%) with banking stocks once again leading the way lower following speculation that an Italian sovereign downgrade was on the cards.

Dow futures were 203 points lower by the European close. EUR was sold steadily throughout the day eventually finding some support at 1.4060. AUD/USD was hit by the wider risk aversion trading down to 1.0513 before settling around 1.0560.

Weakness in NZD was exacerbated by a break of the upward trend line in place since the beginning of August to take it down to 0.8320. Gold rose back above the $1900/oz level rising $25/oz to $1902/oz while oil was 2.2% lower to $84.22/bbl.

AUD/USD and NZD/USD outlook next 24 hours: Downside risks to AUD remain over the next 24hrs given the global backdrop while on the domestic front, the RBA meeting provides scope for a less hawkish statement. GDP and employment data later in the week, however, should provide some support. The downside break in NZD opens the way for a test of the 100dma at 0.8228 with 0.8400 now providing resistance.

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