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Morning FX thoughts - 24 Aug '11

Wednesday 24th August 2011

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Risky markets rallied, largely on hopes Fed Chairman Bernanke will signal stimulus on Friday.

US data (new home sales, Richmond Fed manufacturing survey) were disappointing but perversely, US equities bounced in response, the logic being bad data during the leadup to Friday’s meeting raises the chances of stimulus. The S&P500 is currently up 3.2% and the VIX barometer of risk aversion is down 5ppts to 38.

Earlier news that China’s PMI increased slightly, fuelled optimism during the Asian session, although there was a slump during the London morning. The CRB commodities index is 0.8% higher, oil up 1.7%, copper up 1.0% (data showed China’s imports rose in July), and gold down 3.7% (and forming a bearish key day reversal).

The US 10yr treasury yield is 3bp higher at 2.14%, although it did briefly touch 2.06% after a 5.9 magnitude earthquake in Virginia.

The US dollar index is slightly lower but within the month’s range. EUR rose from 1.4380 to 1.4500 by early London, helped by PMI data which beat expectations, but reversed all the gains before NY opened, currently at 1.4445. Defensive currencies underperformed, USD/JPY continuing to range between 76.50 and 76.80. AUD followed US equities and rose from 1.0465 to 1.0523 during the Asian session, then consolidating until late NY when it peeked at 1.0535. NZD again outperformed, rising from 0.8280 to 0.8368. AUD/NZD fell from 1.2630 to 1.2575.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s corrective rise continues, major resistance overhead at 1.0600 (17 Aug high). NZD similarly can continue higher to 0.8425 today. The monthly NZ trade balance released today is too seasonal and volatile to attract market attention. Finance Minister Bill English speaks in Auckland.

Source: Westpac Global Markets Strategy Group

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