Morning FX thoughts - 13 Jan '12

Westpac Global Markets Strategy Group

Friday 13th January 2012

Much volatility but little change. The first half of the London session was influenced mainly by news of strong government bond auctions in Italy and Spain (Italy sold twice the amount targeted at significantly lower yields), helping drive risky assets higher.

Then the ECB announced unchanged policy settings, as expected, although at the press conference Draghi noted downside risks to growth and the risk of lower inflation – effectively leaving the door open to future stimulus.

The London afternoon saw sentiment reverse, initially after Fitch reiterated Italy faced a material risk of a downgrade by month-end, but mainly due to some weak US economic data (retail sales, jobless claims).

The S&P500 gyrated in a 1.5% range but is currently unchanged. US 10yr treasury yields are 1bp higher at 1.92% after fluctuating in a 1.89%-1.94% range. The 30yr US auction was disappointing, with a 2.6 bid-cover ratio – the lowest since October 2010. Eurozone peripheral debt performed well after the successful Italian and Spanish auctions, Greece’s 10yr yield 46bp lower, Italy -35bp, and Portugal -35bp.

The US dollar index is around 0.5% lower and has made a double top this week, suggesting near term weakness. EUR rose from 1.2700 early London to 1.2845 in NY, largely unruffled by the weak US data. USD/JPY fell from 76.98 to 76.67. AUD rose from 1.0287 to 1.0378 during the London morning but reversed to 1.0291 during the afternoon, later recovering to 1.0330. NZD curiously underperformed after two days of outperformance, suggesting completion of a large transaction. It initially rose from 0.7940 to 0.7981 but then fell to 0.7910. AUD/NZD rose from 1.2930 to 1.3020 as a result.

AUD/USD and NZD/USD outlook next 24 hours: Major events today include Chinese economic data and another large Italian bond auction. AUD may test 1.0385 resistance again today. NZD is more likely to test support at 0.7910.

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