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Morning FX thoughts - 5 Sept '11

Monday 5th September 2011

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AUD and NZD fall after a weak US payrolls

European trading was dominated by focus on US non-farm payrolls (NFP), and most currencies, including the NZD and AUD, treaded water until the release. Prior to the release, European bond markets weakened – sovereign spreads and CDS markets widened (Italy’s five-year CDS spread widened to over 400bps, its highest ever, and three month eur basis swaps showed renewed funding pressure), while equity markets continued their losing streak (the DAX near its 22 August lows).

US equities remained in negative territory from overnight and extended its losses post NFP. The US NFP outturn showed zero additions in the August month, with July revised down 56k to +85k. The wider household survey was mixed to soft - unemployment was unchanged, employment growth in the household survey encompassed a weak July result by rising 331k, but hours worked and hourly earnings both fell. Markets initially wrestled whether to buy US Dollars (risk aversion/safe haven) or to sell it (higher chance of a third round of quantitative easing). The former won fairly convincingly by day's end.

After whipping around 1.4240/80 in the immediate wake of the jobs data EUR eventually settled down just below 1.4200 into the close, while AUD relinquished the 1.07-handle and finished down at 1.0665. The NZD saw whippy trade around the data release and settled around 0.8500 before risk aversion took hold sending it down to 0.8440/60 into the close.

The Dow fell 230pts, taking no solace from a near certain probability that the FOMC will take some form of additional easing measures at their 20-21 Sep meeting. US bond yields also tumbled after the weak US data, the 10yr yield falling almost 15bp to retest the multi decade lows set mid-August at 2.00%. Copper fell 0.7% but gold rose $44/oz amid Europe's banking woes and weak US data.

Outlook

Monday brings a relatively quiet day, with minor Australian and no New Zealand data due for release. The US will be closed, further lightening trading and position taking. But a continuation of a fragile offshore environment will likely keep topside to the NZD at 0.8550, and 1.0762 in AUDUSD. Over the day, we look for the Kiwi to push down through 0.8450 with a break through 0.8400 being less likely, but opening up 0.8350 if it does occur. The data week for AUDUSD is expected to be solid later in the week (GDP and employment) but the RBA hurdle comes first – the committee sitting on the less hawkish side. Over the week, we look for AUDNZD to end the week higher towards the 1.2650 region, after testing 1.2490-1.25 lows.

Source: Westpac Global Markets Strategy Group



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