Morning FX thoughts - 27 Sept '11

Westpac Global Markets Strategy Group

Tuesday 27th September 2011

Markets stabilised on expectations of support from European policymakers. Equity markets took the weekend’s news of consideration of a larger European bailout positively, and there were additional ECB comments last night. It was reportedly considering restarting covered bond purchases and 12 month loans to banks at next week’s meeting, and member Nowotney said interest rates cuts at some point cannot be ruled out.

Countering that, the German finance minister and the Dutch and Finnish prime ministers opposed any increase in the EFSF bailout fund, although there was chatter regarding alternative expansion structures being studied.

The Eurostoxx 50 managed to eke out a 2.8% rally, and the S&P500 is currently 0.7% higher. Commodities firmed moderately, the CRB index +0.8%, oil +1.5%, copper +1.0%, but gold -3.5% and silver -3.4%.

US 10yr treasury yields are 7bp higher at 1.90%. The Fed’s Bullard reiterated his favouring of asset purchases as a policy tool. The Greek 10yr is 43bp higher, the Portuguese +22bp.

The US dollar index consolidated after a making a fresh 8-month high during early London. EUR rose from 1.3363 (an 8-month low) to 1.3543 and then settled around 1.3450. German business confidence beat expectations slightly and helped the EUR rebound. USD/JPY was confined to 76.24-76.50.

AUD made a 10-month low of 0.9622 just after the Sydney close and then rose to 0.9828 by midday London, settling between 0.9700-0.9760. NZD rose from a 5-month low of 0.7638 to 0.7809 and then consolidated. AUD/NZD ranged between 1.2570 and 1.2650.

AUD/USD and NZD/USD outlook next 24 hours: There is little of market importance on the calendar today so that the slight improvement in global sentiment should nudge the currencies a little higher. AUD should bounce correctively to 0.9860 today. Similarly, NZD could bounce to 0.7860 today.

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