Westpac Global Markets Strategy Group
Tuesday 22nd November 2011
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Risk sentiment fell.
For a change, the main catalyst wasn’t a Euro-headline but related to the US Super Committee’s failure to agree on fiscal deficit reduction ahead of the Wednesday deadline. The concern is not only that rating agencies may take a dim view of any inaction, but also that politicians are unable to agree at a time when the US economy is in a vulnerable state.
Apart from this, the Eurozone still managed to provide a couple of negative headlines which contributed to the slide, Moody’s warning France’s AAA rating’s stable outlook is at risk due to elevated funding costs, and Fitch warning the Eurozone crisis poses a threat to US banks.
The S&P500 is currently down 2.1% and has retraced 50% of October’s gains. The CRB commodities index is down 1.5%, oil -1.9%, copper -3.2%, and gold -2.7% displaying pro-risk behaviour. US 10yr treasury yields are 5bp lower at 1.96%, touching 1.94% in NY. The 2yr auction went well, benefitting from a flight to safety despite US fiscal concerns. The notes were awarded at market yield and had a record bid-cover ratio of 4.1 with 42% bids from offshore (highest since Feb 2010). Spain’s 10yr yield rose 17bp despite the weekend’s market-friendly conservative party victory.
The US dollar index is only modestly higher given the main story of the day was US-related. EUR is little changed after slumping from 1.3525 to 1.3420 by midday London but recovering to 1.3540 in NY. USD/JPY firmed a tad from 76.77 to 76.99. The high beta currencies underperformed, AUD falling from 0.9987 to 0.9809 and is currently at 0.9850. NZD fell from 0.7570 to 0.7449 and is at 0.7485. AUD/NZD ranged between 1.3170 and 1.3205 in London but later broke down to 1.3150.
AUD/USD and NZD/USD outlook next 24 hours: AUD momentum is negative and a continuation of this move towards 0.9388 (the early October low) is expected during the next week or two. Any corrective bounce today should be capped at 0.9965. NZD is currently testing its own early Oct low at 0.7470, an eventual break expected but any corrective bounce today should struggle above the 0.7535-0.7565 area. China PMI (HSBC) and the RBNZ’s inflation expectation survey will be important today.
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