Morning FX thoughts - 30 Aug '11

Tuesday 30th August 2011

Risk appetite holds for another day.

US equity markets posted strong gains in an eye-catching follow-up to Friday's Jackson Hole rally, though with less impact on FX than might have been expected. The S&P futures' gains in Asia were extended in the cash market, SPX trading up 2.5% in late NY. Further optimism over Fed action and less damage than expected from Hurricane Irene were cited as key drivers.

Yet AUD/USD rose all of about 20 pips from late Sydney to 1.0635/40, almost as though waiting for London to reopen after the bank holiday. Equities didn't seem fazed by the slight upwards revision to key inflation measure the core PCE deflator, taking the y/y rate to 1.6% and not helping the dovish Fed views (likewise with the 0.8% jump in consumer spending).

The 10 year Treasury yield did however push higher, from 2.20% late Sydney to just short of 2.30% before steadying around 2.27%.

Jul pending home sales were a little softer as expected while the Aug Dallas Fed manufacturing index was weak, matching most similar surveys. Europe's squabbling over the contributions to the EFSF bailout fund and focus on the German court review of the fund's constitutionality kept EUR/USD capped around 1.4550, but it was quite stable overall, mostly trading the low 1.45s.

While the hurricane damage was less than insurers feared, there were still many absences in NY due to storm damage around the tri-state area. USD/JPY found support under 76.60 but stalled at 77.00 and is likely to need further increases in US yields to sustain rallies near term. NZD/USD traded quietly in the mid-0.84s, with a high of 0.8469, translating to a gentle rise in AUD/NZD from 1.2550 to 1.2595. Commodities were mixed, Comex copper +0.2% but gold -2.5% to $1782/oz and WTI crude oil +2.4% to $87.50/bbl.

Outlook: Markets will probably remain cautiously upbeat for now. AUD/USD should aim for the high 1.06s and NZD/USD 0.8475. Local calendars feature Jul building approval data in both Australia and NZ.

Source:Westpac Global Markets Strategy Group

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