Morning FX thoughts - 16 Jan '12

Westpac Global Markets Strategy Group

Monday 16th January 2012

Sentiment falls in choppy markets. New year rallies came to an abrupt end after midday London as stories of widespread European sovereign downgrades circulated and were gradually confirmed by some European officials.

Nine countries were downgraded, including France and Austria by one notch, Italy, Spain and Portugal by two notches, and 14 were placed on negative watch. Germany’s AAA remained intact.

Additional negative news came from the talks between Greece and bondholders which appeared to break down over disagreement over the degree of writeoff.

The S&P500 lost 1.7% during the London session but partly recovered in NY, possibly on relief the downgrades were less severe than feared as well as a strong US consumer confidence report. It closed down 0.5%, and the CRB commodities index closed down 0.7% (oil -0.4%, copper -0.3%, and gold -0.7%). US 10yr treasury yields closed 6bp lower at 1.86%.

The US dollar index rose around 0.8%. EUR was the underperformer of the day, falling from early London’s 1.2879 to 1.2624 during the afternoon, and then ranging between there and 1.2700. It formed a technically bearish outside down day (continuation) and opens in NZ lower at 1.2647. USD/JPY rose from 76.67 to 77.01 and then stalled.

AUD initially firmed during the London morning to 1.0368 but plunged to 1,0232 on the European ratings rumours, rebounding to 1.0334 in NY with equities. It opens lower at 1.0301. Outperformer NZD similarly fell from 0.7955 to 0.7866 and rebounded to 0.7948. AUD/NZD fell with the decline in risk sentiment from 1.3050 to 1.2980.

AUD/USD and NZD/USD outlook next 24 hours: Economic data from Australia and NZ today is minor and should have little market impact, the main influence likely to be continued fallout from the European downgrades (as the credit quality of the bailout mechanisms is reassessed, for example). AUD’s 1.0385 resistance repelled several attempts this month and should cap price action today, NZD’s 0.7980 providing a similar obstacle.

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