Morning FX thoughts - 1 Mar '12

Westpac Global Markets Strategy Group

Thursday 1st March 2012

Risk sentiment weakened after Bernanke’s testimony. The second of the two major events of interest, the Fed Chairman delivered a less downbeat assessment of the US economy, disappointing markets which had expected hints of further stimulus.

The first key event, the ECB’s liquidity injection via the 3 year LTRO, elicited only a lukewarm and brief positive response, suggesting the result was within the broad range of market expectations. A total of EUR 530bn was lent to 800 European banks, compared to EUR 490bn to 523 banks at the previous LTRO in December.

The S&P500 is currently 0.2% lower, having firmed slightly following the LTRO but falling by around 1% following Bernanke. The CRB commodities index is 0.6% lower, oil -0.5%, copper -1.0%, and gold -3.5% (the latter forming a bearish key day reversal).

US 10yr treasury yields are 5bp higher at 1.99%, initially falling to 1.91% after the LTRO. Eurozone peripherals rallied, apart from Greece (10yr yield +43bp) and Portugal (+73bp), these bonds considered too risky to benefit from LTRO cash. The ECB was seen buying small amounts of Portuguese bonds.

The US dollar index (DXY) is around 0.5% higher, and formed a technically bullish key day reversal pattern. Underperformer EUR was briefly supported by the LTRO but fell from 1.3469 to 1.3334 following Bernanke’s testimony. USD/JPY rose from 80.25 to 81.23, helped by US data surprises for GDP, personal income, and the Chicago PMI. AUD gained around 50 pips to 1.0856 (highest since August) after the LTRO but lost around a cent to 1.0755 after Bernanke. NZD also made a six-month high at 0.8471 but then fell to 0.8377. AUD/NZD slipped from 1.2840 to 1.2805.

AUD/USD and NZD/USD outlook next 24 hours: The US Beige Book of economic conditions will be released shortly. Australian building approvals and capital expenditure hold minor market interest, while NZ’s terms of trade is widely expected to slip. China’s PMI is perhaps the main event of the day. AUD resistance at 1.0860 should cap the currency today. NZD also has a negative bias on the day but no lower than 0.8350.

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