Morning FX thoughts - 03 Oct '11

Westpac Global Markets Strategy Group

Monday 3rd October 2011

Risk markets ended the week lower. Concerns the major global economies are failing to fire were stoked by a weak Japanese industrial production report, an underwhelming official China PMI reading, and comments from the COO of the Economic Cycle Research Institute that the US economy is tipping into recession.

US personal income was weak, while consumer confidence and the Chicago PMI beat estimates but provided only brief support for markets.

The Eurostoxx 50 closed down 1.5% and the S&P500 closed down 2.5% with the VIX barometer of risk aversion rising 4ppts to near the September high. The CRB commodities index closed 2.6% lower, oil -3.6% and copper -2.8%.

US 10yr treasury yields closed 8bp lower at 1.92%, outperformed by the 30yr bond which fell 14bp after details of the Fed’s new purchasing program favouring longer maturities was published.

The US dollar index benefitted from the risk averse mood. EUR fell steadily throughout the London and NY sessions, from 1.3560 to 1.3384.

German retail sales plunged, and Spain confirmed it will take over three troubled lenders.

USD/JPY rose from 76.50 to 77.20, the weak Japanese data hurting the otherwise preferred safe-haven currency. AUD fell from 0.9782 to 0.9661, and opens this morning in NZ slightly weaker.

Given the two-agency downgrade on Friday, the NZD did surprisingly well, peaking in NY at 0.7686 during the brief equities bounce following consumer confidence, but then resuming its slide to 0.7613. It opened this morning at 0.7605. AUD/NZD fell from 1.2770 to 1.2680.

AUD/USD and NZD/USD outlook next 24 hours: The Australian holiday today will reduce liquidity for AUD and NZD. AUD is close to major support at 0.9620 and a break points next to 0.9540. NZD should continue lower to the 0.7500 area although its performance on Friday warns against shorting here.

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