Morning FX thoughts - 28 Oct '11

Westpac Global Markets Strategy Group

Friday 28th October 2011

Sentiment soars on grand Euro-plan. The fabric of the eagerly awaited Eurozone rescue plan was revealed during yesterday’s Asian session and caused equity markets around the globe to surge, commodities, currencies, and interest rates following suit.

The market’s euphoria was probably related to relief a global catastrophe had been averted for now, despite the possibility that execution will prove difficult.

The salient points of the package are a 50% voluntary haircut on Greek debt (which ISDA said shouldn’t trigger a credit event for CDS’s), a EUR 1tr leverage of the EFSF rescue fund, a bank recapitalisation framework, an IMF role in the rescue, and continuing ECB bond purchases.

The Eurostoxx 50 closed up 6.1%, while the S&P500 is up 3.4% currently to a three-month high. The CRB commodities index is up 2.6%, oil +3.0%, copper +5.8%, and gold +1.3%.

US 10yr treasury yields are 19bp higher at 2.40% - a three-month high – as safe havens were liquidated. A 7yr auction was unsurprisingly poorly received. The Greek 10yr fell 198bp in relief.

The US dollar index fell around 1.8%. EUR rose from around 1.4050 (pre-EZ rescue news) to 1.4247 – a two month high. USD/JPY made a fresh low at 75.66 but recovered to 75.95.

AUD continued the Sydney session rise throughout the evening to 1.0753 and was the day’s outperformer. NZD rose to 0.8224 but was outpaced by several high-beta currencies. AUD/NZD rose to 1.3090.

AUD/USD and NZD/USD outlook next 24 hours: AUD momentum remains positive but the 1 September peak of 1.0765 should provide resistance. It is severely overbought intraday and should pull back a little before advancing towards that peak. Similarly, NZD’s multi-day upside target has been extended to 0.8340 but a pullback to 0.8100 today is needed.

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