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Morning FX thoughts - 2 Sept '11

Friday 2nd September 2011

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NZD and AUD continue to outperform EUR

The euro took a hit in European trading after Spanish and Italian bond auctions were not as well subscribed as hoped. Spain sold EUR3.6bn in 5 year bonds, below the planned EUR4bn, stoking fresh concerns about peripheral EU sovereigns (though EU bond markets were relatively well behaved). Germany's PMI also underwhelmed, revised down to 50.9 vs expectations for a flat outcome at 52.0. EUR fell from 1.4360 to 1.4300 and then had another push down to 1.4225 mid morning NY after the US ISM came out on the stronger side of low expectations.

AUD meanwhile outperformed, thanks to earlier stronger than expected retail sales and CAPEX data. AUD ranged 1.0690 to 1.0730 in London and rose to session highs of 1.0767 in NY trading. NZD was not quite as buoyant as the AUD in London but nonetheless rose from European session lows of 0.8473 up to 0.8510/20 in NY.

The S&P500 fell 1.2% overnight, only seeing a brief reprieve around the not as weak as feared ISM. The less weak ISM may have dimmed expectations for QE3 but payrolls data will be more important and the data doesn't in any case alter the picture of an economy that is stalling close to recession. US 10yr yields jumped 10bp after the ISM but reversed course to finish down 7bp at 2.13%. Gold was flat on the day while copper dropped 1.4%.

The US ISM manufacturing survey edged down from 50.9 to 50.6 in August, better than consensus at 48.5. The detail showed a 3.7 pt drop in production to 48.6, a 0.4 pt rise in orders to 49.6 (contracting for the second month running), a 1.7 pt drop in jobs to 51.8, little change in deliveries at 50.6 and a 3.0 pt rise in inventories to 52.3. Essentially that means that US industry is seeing orders and output shrink, and hiring fewer extra workers, but because stocks accumulated rather than fell in Aug (adding 0.6 pts to the ISM headline), the headline held above 50. Without that inventory pick-up, the ISM headline would have fallen to 50, indicating a stalled industrial sector, rather than one that is nearly stalled.

US initial jobless claims fell from 421k to 409k last week. With the Verizon strike spike in claims now behind us, the underlying picture remains one of a steady pace of layoffs a little above 400k per week, neither improving or deteriorating in the last two months. What this doesn’t tell us is what hiring firms may be doing - and that could be the main determinant of any change in the pace of jobs growth in the current monthly jobs figures.

Euroland PMI factory was revised down from 49.7 to 49.0 in the final August reading, indicating more of a contraction in the sector than previously reported. More of the revision came from Germany, revised from 52.0 to 50.9. German GDP growth unrevised at 0.1% in Q2, but the detail showed a steep 0.7% contraction in private consumption, more than reversing Q1’s 0.4% rise, and matching the steepest pace of quarterly decline in consumption that occurred during the 2008-2009 recession.

Outlook: NZ and Australia are devoid of data today. Ahead of the all important US non farm payrolls expect quiet trading conditions. NZD will likely be pinned between 0.8480 and 0.8530 on the day. AUD will find buyers just below 1.07 and sellers into 1.0760. Westpac's August non-farm payrolls forecast of 20k is well below the current consensus expectation of 70k (revised down from 95k). This is, in part, due to our belief that the July outcome benefited from a number of one-offs and the near stall growth conditions in recent months.

Source: Westpac Global Markets Strategy Group



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