Morning FX thoughts - 12 Oct '11

Westpac Global Markets Strategy Group

Wednesday 12th October 2011

Markets paused. There was little advance on the rally in risky assets which started on 4 October, the news flows fairly minor.

The Slovakian debate to ratify the July version of the EFSF bailout fund remains in progress, ECB President Trichet said the EU crisis was turning systemic, IMF/EU/ECB inspectors said Greece would miss its 2011 targets but implied the next EUR8bn tranche of its EUR110bn rescue package should be approved by early November, and an Italian treasury bill auction went well.

All this left equity markets with a consolidative tone, the S&P500 currently up 0.2%. Most commodities continued to advance, the CRB index up 0.8%, oil +1.0%, but copper -2.3% on China concerns.

US 10yr treasury yields are little changed from early London levels at 2.17%. Of the Eurozone peripherals, the Irish 10yr stood out with a 47bp yield rise on concerns slower global growth will hamper Ireland’s recovery.

The US dollar index is little changed around 77.55. EUR slipped from the early London 1.3673 to 1.3566 but recovered to 1.3684, modestly outperforming the majors. USD/JPY was confined to a narrow 76.60-76.76 range. AUD slipped from the Sydney close of 0.9984 to 0.9906, recovering in NY to 1.0003. Similarly, NZD slipped from 0.7839 to 0.7761 but recovered to 0.7842. AUD/NZD ground higher from 1.2720 to 1.2780.

AUD/USD and NZD/USD outlook next 24 hours: The upward corrections remain intact. AUD should eventually break above 1.0015 and 0.9875 should contain any brief pullbacks. Similarly, NZD should push above 0.7860, 0.7760 containing pullbacks. Event risk today comes from Australian consumer sentiment, housing finance, and RBA-speak (Debelle on FX trading). FOMC minutes tonight may shed light on future stimulus.

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