Morning FX thoughts - 1 Feb '12

Westpac Global Markets Strategy Group

Wednesday 1st February 2012

Risk currencies outperformed during a mixed overnight session.

Major asset classes were buoyed during London by the EU summit’s agreement of 25 countries to establish a fiscal discipline treaty, as well as an FT article the next ECB offering of cheap liquidity to banks could be several times as large as the previous offering in December.

The mood was soured during NY after the release of weaker and sub-consensus data for consumer confidence, house prices and the Chicago PMI.

The S&P500 is currently down 0.1%, falling 1.1% after the US data. The CRB commodities index is down 0.5%, oil +0.1% and copper -0.9%. US 10yr treasury yields are 4bp lower at 1.81%, breaking trend support at 1.85% and pointing to lower yields ahead.

The main Eurozone peripheral movers were Portugal (-99bp) and Greece (+28bp), the latter a reflection of little progress from the debt-swap talks.

The US dollar index is slightly higher on the day, rebounding an impressive 1.0% in NY and potentially setting up a technically bullish key day reversal pattern. EUR extended Asia’s gains to 1.3214 but slumped after midday London to 1.3042. USD/JPY probed lower and just made a fresh three-month low at 76.16. AUD rose to 1.0685 by mid-morning London and then retreated to 1.0588 after the US data. NZD outperformed, making a 4 ½ month high of 0.8301 before slipping to 0.8240. AUD/NZD broke lower, from 1.2920 to 1.2840.

AUD/USD and NZD/USD outlook next 24 hours: There is the Australian house price report to watch today, as well as Fonterra’s milk auction tonight and China PMI this afternoon. AUD momentum remains positive but an overbought condition warns of a significant reversal during the week or two ahead. Today’s price action should be inside 1.0520 and 1.0680. NZD’s upward channel remains intact but it’s also overbought and a divergent reversal is brewing. Immediate resistance is at 0.8300 and then 0.8340.

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