Morning FX thoughts - 29 Sept '11

Westpac Global Markets Strategy Group

Thursday 29th September 2011

A three-day rally in equity markets snapped. The S&P500 turned lower just before midday London and accelerated into late NY to be -1.2% currently.

Metals producers led the way, currently 4.8% lower, suggesting global economic growth concerns had some part to play during an evening which provided little fresh significant news. The large fall in commodity prices is consistent with that view, the CRB index down 2.3%, oil -3.4%, copper -5.6%, gold -3.0% and silver -7.1%.

There was mixed but minor news from Europe, Finland approving an expansion of the EFSF bailout fund as many expected, and opposition to larger Greek debt haircuts from a European Commission official. The EC also raised its proposal for a financial transactions tax, dampening the mood of equity markets.

Demand for 3mth money from the ECB’s tender was high, indicating funding concerns remain high in Europe.

US 10yr treasury yields bucked the trend, rising 10bp to 2.06% although they have slipped to 2.00% as we write. The 5yr auction went well at 1bp below market yield and a bid-cover ratio of 3.0 (vs 12mth average of 2.8).

The US dollar index rose during NY’s risk averse phase from 77.31 to 77.97. EUR bounced from around 1.3550 after Sydney closed to 1.3690 during the London morning but then retraced completely to 1.3551. That was despite a larger-than-expected German inflation print. Safe-haven yen outperformed, USD/JPY stable between 76.35 and 76.55. AUD rose to 0.9955 during the London morning but then fell to 0.9803. Underperformer NZD fell from a London peak of 0.7902 to 0.7773. AUD/NZD rose from 1.2560 to 1.2630.

AUD/USD and NZD/USD outlook next 24 hours: Worth watching during the day ahead will be Germany’s vote on the EFSF expansion. Immediate direction is unclear for the AUD until the recent 0.9620-0.9986 range breaks. Further out we remain bearish. NZD similarly needs to break outside 0.7640-0.7960 to signal multi-day direction. RBNZ Governor Bollard speaks on radio today, and a record (equal) sized NZGB tender will be held today.

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