Morning FX thoughts - 14 Oct '11

Westpac Global Markets Strategy Group

Friday 14th October 2011

Consolidation. The rallies in risk markets since 4 October took a breather on a reassessment of the likelihood of a grand solution to Europe’s debt crisis.

Pre-London news of a lower China trade balance contributed to the subdued mood, Fitch later downgrading UK banks Lloyds and RBS and putting Barclays on negative watch due to the reduction of implicit government support.

Italian banking stocks fell heavily. The ECB warned that Greek debt haircuts could damage the euro’s reputation, reminding the market of divergent views among policymakers,

Positive snippets included Slovakia’s formal ratification of the EFSF expansion, and some decent US jobless claims data. The S&P500 is currently down 0.6%.

Commodities were little changed overall, the CRB index up 0.1%, but with staples oil -1.1% and copper -2.6%.

US 10yr treasury yields fell 9bp to 2.12% in NY but recovered to 2.16% currently. The 30yr auction went well, 3.5bp below market yield and with a 2.9 bid-cover ratio (1 year average 2.6).

The US dollar index firmed slightly. EUR slipped from 1.3826 to 1.3685 in London, recovering to 1.3781 in NY. USD/JPY slipped to around 76.85, the yen outperforming all on the day.

AUD fell from an early London peak of 1.0226 to 1.0102, recovering in NY to 1.0190. NZD fell from 0.7967 to 0.7890 and bounced back to 0.7951. AUD/NZD drifted lower from 1.2840 to 1.2800.

AUD/USD and NZD/USD outlook next 24 hours: There is probably more to go in this corrective rally in AUD but some consolidation under 1.0240 is likely today. NZD has not sustained its break above 0.7960 and should consolidate below that today. China CPI today will be watched, and this weekend’s G20 finance ministers’ meeting should produce a stream of headlines relating to the Eurozone debt crisis.

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