Morning FX thoughts - 1 Nov'11

Westpac Global Markets Strategy Group

Tuesday 1st November 2011

Markets spent a second consecutive day questioning whether an extension of October’s risk rally was justifiable. Apart from continuing scepticism the Euro-rescue plan will prove adequate, the BOJ’s intervention yesterday to weaken the yen pushed the US dollar higher and in turn, commodities lower.

Additional bearish news came from the weaker and sub-consensus Chicago PMI report, as well as MF Global (US primary bond dealer) filing for bankruptcy. The firm reportedly had a large exposure to peripheral European government bonds.

The Eurostoxx 50 closed down 3.1%, and the S&P500 is currently down 1.3%. The CRB commodities index is 1.3% lower, oil -0.7%, copper -2.0%, and gold -1.2%.

US 10yr treasury yields are 12bp lower at 2.20%, reflecting safe-haven demand, while the Italian equivalent rose 16bp to the peak yield area prevailing in early August.

The US dollar index consolidated its Asian session gains between 75.9 and 76.3 EUR slumped further to 1.3906 in NY after consolidating in London around 1.4000, and well below the pre-BOJ level of 1.4150. USD/JPY was at 75.57 before the BOJ intervention pushed it to 79.53, but London saw it partly retrace to 77.76 and it spent NY stuck around 78.00. The market will likely be wary of treating the yen as a safe-haven instrument.

AUD bottomed around the Sydney close at 1.0507 and partly recovered to 1.0611 overnight. NZD bottomed at 0.8078 and recovered to 0.8148. AUD/NZD firmed from 1.2980 to 1.3060.

AUD/USD and NZD/USD outlook next 24 hours: Today’s key event for both currencies is the RBA meeting, economists divided on whether it will cut the policy rate but the market has already priced 76% of a 25bp cut. Any RBA inaction will probably push AUD higher. Barring a surprise, AUD should drift towards 1.0505 – yesterday’s low – and any rally today should be contained by 1.0655. NZD should be capped today by 0.8165, a drift towards 0.8080 more likely. AUD/NZD today is a bet on the RBA decision.

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