Morning FX thoughts - 25 Jan '12

Westpac Global Markets Strategy Group

Wednesday 25th January 2012

Risk sentiment fell in London and rose in NY for a small net loss. The S&P500 has recovered from -0.9% to 0.3% currently.

The main drag on sentiment was the rejection by Eurozone finance ministers of the offer by Greek bondholders to swap old debt for new with a 4%+ coupon, the officials requiring a 3.5% starting coupon.

A pre-London WSJ article that Portugal may require a second bailout and Standard & Poor’s downgrades of major French banks continued to weigh. The rating agency also commented the evolving Greek deal was likely to result in a selective default rating for the country.

There was some offsetting positive news including Spain’s successful 3mth and 6mth bill auction, and above-consensus and improved Eurozone PMI’s.

The CRB commodities index is up 0.2%, oil -1.0%, copper unchanged, and gold -0.7%. US 10yr treasury yields are 1bp higher at 2.06%, having ranged between 2.03% and 2.08% overnight. The 2yr auction went well with a 3.8 bid-cover ratio (12mth average is 3.4). Greek and Portuguese 10yr government bond yields fell by -20bp and -25bp respectively.

The US dollar index is little changed after gyrating inversely with risk sentiment overnight. EUR consolidated between 1.2955 and 1.3063. USD/JPY surged from 77.00 to 77.85 after the BOJ downgraded its growth outlook at its meeting. AUD extended its domestic session slide to 1.0428 before recovering in NY to 1.0483. NZD similarly recovered from a London low of 0.8056 to 0.8108. AUD/NZD fell from 1.2960 to 1.2930.

AUD/USD and NZD/USD outlook next 24 hours: Global markets will focus on the FOMC meeting 23 hours from now, and Australian CPI will attract market attention this afternoon. While AUD momentum slowed yesterday, it remains positive and targets 1.0600. NZD remains inside its upwards trend channel resistance defined by 0.7980 and 0.8160 today.

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