Morning FX thoughts - 8 Dec '11

Westpac Global Markets Strategy Group

Thursday 8th December 2011

More waiting. The markets remained in low-activity mode, unwilling to place large bets ahead of the key ECB meeting tonight and the EU Summit result tomorrow night.

The S&P500 is currently unchanged from both Monday and Tuesday’s closes, although there was some intraday movement, a London session dip retraced in NY. The earlier negativity was caused by unattributed German official comments that it was opposed to combining the ESM and EFSF. There were also comments that unanimous agreement on Treaty changes at the Summit was unlikely.

Demand for the ECB tender of 3mth USD was five times the expected volume at $51bn, although it’s debatable whether that was due to the recently lowered cost or desperation for funding. The NY bounce may have related to unnamed officials’ comments the ECB may tonight cut by 25bp, loosen the collateral criteria, and extend the liquidity window maturity.

US 10yr treasury yields have fallen from a London morning peak of 2.12% to 2.05%, adopting a more defensive posture than equities.

The US dollar index is barely changed on the day, rising in London and slipping in NY. EUR fell from an early London peak of 1.3454 to an early NY trough of 1.3351 and recovered to 1.3420. USD/JPY was locked inside 77.60-77.80, probing the lower bound.

AUD dipped from an early London peak of 1.0299 to 1.0234 in NY and recovered to 1.0293. NZD fell from 0.7832 to 0.7751 but only partly recovered to 0.7797 in the day’s underperformance, perhaps a reflection of dovish expectations regarding the RBNZ outcome today. AUD/NZD according rose from 1.3150 to 1.3220.

AUD/USD and NZD/USD outlook next 24 hours: The AUD requires a break outside its recently well defined ranged of 1.0150-1.0325 to establish near term direction. The NZD requires a break outside 0.7725-0.7840. Key local events today are the RBNZ meeting and the Australian employment report, while offshore all will be fixated by the ECB.

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