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Morning FX thoughts - 10 Aug '11

Wednesday 10th August 2011

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The FOMC statement initially disappointed investors looking for stimulatory signals, although a more positive interpretation is unfolding as we write. The Fed did adopt one fresh policy enhancement option – explicitly defining the “extended period” for low interest rates (mid-2013), the first time the Fed has done so. However there was no such explicit language regarding the period of asset reinvestment no any mention of lowering interest rates on reserves. Still, the commitment to hold the Fed Funds rate at zero until mid-2013 should serve to lower and cap yields at the front of the treasury yield curve, which in turn should be stimulatory for equities.

Equity markets initially bounced on the commitment but sagged after a few minutes, possibly due to the degree of dissent (3 voted against) or the overall sombre description of the economy or the lack of additional commitments. After further reflection, the S&P500 is currently up 1.9%, and the VIX (risk aversion indicator) is 8ppts lower at 40. The CRB commodities index is 0.5% lower, oil -3.3%, copper -0.7%, and gold +2.6% to a fresh high of $1778. US 2yr treasury yields plunged 22bp to 0.16% (fresh low) after the FOMC, the 5yr fell 20bp, and the 10yr fell 12bp.

Safe-haven currencies again outperformed. The US dollar index is lower, influenced by lower US interest rates. EUR was relatively stable between 1.4200 and 1.4290 apart from a brief spike to 1.4318 after the FOMC and is re-testing that as we write. USD/CHF made a fresh low of 0.7071 after the FOMC, USD/JPY was contained inside 77.00 and 77.50 but fell to 76.71 with the rest. AUD ranged between 1.0081 and 1.0257 until the FOMC, immediately spiking to 1.0236, then sagging to 1.0065, but currently at 1.0255. NZD similarly ranged between 0.8108 and 0.8247, currently probing higher to 0.8262. AUD/NZD ranged between 1.2350 and 1.2490.

AUD/USD and NZD/USD outlook next 24 hours: Equity markets will again be watched for signs of stability.  AUD medium-term momentum remains negative although it is oversold and a corrective bounce to 1.0300 is possible today. Today’s consumer sentiment release is unlikely to be AUD-supportive though.NZD similarly could bounce to 0.8300.

Source: Westpac Global Markets

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