Morning FX thoughts - 6 Dec '11

Westpac Global Markets Strategy Group

Tuesday 6th December 2011

Risk rally extended. Some positive news from Europe helped buoy a market expecting much from policymakers this week.

The Italian Government will present to Parliament a set of austerity and growth measures worth around EUR30bn, including guaranteeing bank bond issuance as part of an EU agreement to bolster financial system confidence.

In addition, the German and French leaders have apparently reached an agreement on a strategy for the Eurozone, including a revised treaty, automatic sanctions for fiscal offenders, starting the ESM permanent rescue mechanism in 2012 rather than 2013, and a future bailout blueprint (IMF standards). Details will be presented at the EU Summit this Friday.

Eurobonds appeared to be off the agenda, but the market considered enough progress had been made to push the S&P500 1.6% higher currently. US 10yr treasury yields rose 7bp to 2.11%, currently at 2.09%.

Eurozone peripherals rallied strongly, Italy -73bp to 5.95%, Spain -56bp and Portugal -57bp. Greece was the exception, up182bp to a fresh record of 32.40%.

The US dollar index is around 0.3% lower on the improved sentiment. EUR rose from 1.3400 to 1.3487 before settling around 1.3450. USD/JPY slipped from 78.07 to 77.72.

AUD probed recent recent resistance, rising from 1.0203 to 1.0305 and outperforming the majors. NZD rose from 0.7762 to 0.7837. AUD/NZD displayed pro-risk behaviour, rising from 1.3110 to 1.3186.

AUD/USD and NZD/USD outlook next 24 hours: The RBA meeting today will dominate local markets which are expecting a 25bp cut, although economists are divided. An AUD break above 1.0325 area resistance then targets 1.0450. A NZD break above 0.7835 then targets 0.7910. Fonterra’s dairy auction will attract minor market attention.

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