Morning FX thoughts - 7 Nov'11

Westpac Global Markets Strategy Group

Monday 7th November 2011

FX markets were whiplashed on Friday night, rounding out a tough and exhausting week. Talk of position liquidation relating to the closure of MF's Global's client positions, a weaker than expected Canadian employment report and soft Service PMIs indices for Europe made for a bearish tone in early dealings but currency markets mostly just consolidated.

US payrolls came in at 80k in Oct but the report included a solid +100k in upward revisions to prior months and a better than expected 0.1ppt fall in the unemployment rate.

The initial reaction to the jobs report saw risk assets rally but the focus quickly turned back to Europe with short term Italian bond yields rising +30bp to above 6.0% and rumours of a sovereign downgrade for Austria.

The negative tone was accentuated by news that the G20 concluded with no agreement on boosting IMF involvement in the EU rescue package and comments from German Chancellor Merkel that, "hardly any countries" outside the Eurozone have signalled a willingness to be involved in the EU rescue plan. EUR fell from highs near 1.3870 to lows near 1.3710 while AUD shed about 110pts, hitting session lows just below 1.0320.

NZD fell from 0.7950 to 0.7882 amid the negative news flow. However, currencies pared their losses into the close as rumours resurfaced that Greek PM Papandreou was about to resign. The AUD finished NY near 1.0390 while the NZD closed the week at 0.7955.

The S&P500 fell 0.6% on Friday night, while copper declined 0.7%. US bond yields initially rose on the stronger than expected US jobs report but finished the session down 4bp at 2.04%.

Markets are likely to remain nervous on Monday morning. While Greek PM Papandreou survived a vote of confidence on Friday evening, the head of the main opposition New Democracy Party, Antonis Samaras said he had no interest in a coalition Government suggesting any near term deal was not workable.

On top of that, German paper FAZ confirmed that it was Merkel that had rejected the use of the IMF stability fund to help Europe. With the G20 meeting being branded a "failure" by the financial press and the situation no clearer in Greece, markets should remain risk averse.

AUD/USD and NZD/USD outlook for the next 24hrs: Both AUD and NZD should remain capped by recent highs. The 1.0450/1.0525 regent represents formidable resistance for the A$ while NZD should remain capped by the 0.80 level.

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