Morning FX thoughts - 16 Dec '11

Westpac Global Markets Strategy Group

Friday 16th December 2011

A modest bounce. Risk markets were slightly firmer, better US jobless claims and US regional manufacturing data, as well as an over-subsubscribed Spanish government bond auction (EUR6.0bn vs 3.5bn targeted) helping sentiment.

Partly offsetting that, IMF head Lagarde said the crisis is escalating and cannot be resolved by one group of countries. ECB head Draghi also spoke, in Berlin, again dismissing the idea of money printing as an immediate fix by referencing its price stability mandate and EU Treaty rules. He added the austerity prescribed for troubled countries will cause short term economic pain but should also reduce market uncertainty.

The S&P500 is currently up 0.7% and the CRB commodities index is unchanged. US 10yr treasury yields rose 4bp to 1.94%, while the Spanish and Italian versions fell over 20bp (the latter forming a yield-bearish key day reversal). A 5yr inflation-linked US treasury auction went well considering the global growth and inflation outlooks.

The US dollar index consolidated the week’s significant gain. EUR fluctuated in a 1.2960-1.3050 range, at 1.3000 slightly firmer than the 1.2980 Sydney close. Switzerland’s central bank did not change its currency target at its scheduled meeting.

USD/JPY fell from 78.05 to 77.75 and settled at 77.90. AUD bounced after the Sydney close, from 0.9862 to 0.9989 by the NY open, settling around 0.9940. NZD similarly bounced from 0.7462 to 0.7556, now at 0.7540. Fickle AUD/NZD was anti-risk, falling from 1.3240 to 1.3165.

AUD/USD and NZD/USD outlook next 24 hours: AUD momentum remains negative. The 1.0000 level should cap prices today while a break of vulnerable 0.9860 targets 0.9665 days later. NZD should be capped by the 0.7610-0.7640 area today and a break below 0.7460 targets 0.7370 next. There is no economic data of note for either country today, global sentiment and European headlines the most obvious near-term potential catalysts.

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