Morning FX thoughts - 9 Dec '11

Westpac Global Markets Strategy Group

Friday 9th December 2011

Hopes dashed. In the first of two key events for the Eurozone crisis this week, the ECB announced it cut the policy rate by 25bp to 1.00%, will provide longer term (3yr) liquidity to banks, and widened the range of collateral it would accept – all widely expected.

The blow to markets came during the press conference, when ECB President Draghi said his comment last week that they could “do more” did not refer to unsterilized bond intervention and that such action is prohibited by the Treaty. He also largely ruled out channelling ECB money to troubled countries via the IMF.

Considering the ECB also raised its inflation forecasts for 2011 and 2012, the prospect of any quantitative easing signal during the next few months looks dim. Risk markets rose slightly after the ECB statement but tumbled after the Draghi comment, the S&P500 now down 1.4%.

There was also negative news from the European Banking Authority which revised its estimate of additional capital European banks need to raise up by EUR8bn.

The Greek 10yr government bond yield rose 71bp to a fresh record of 34.71%, Italy +47bp to 6.46%, and Spain +38bp to 5.81%. The US 10yr yield is 5bp lower to 1.98% on safe-haven buying.

The US dollar index is higher and formed a technically bullish outside-up day. EUR was quiet ahead of the ECB meeting, rising from 1.3380 to 1.3460 around the statement release, but plunging to 1.3289 after Draghi ruled out QE. USD/JPY was volatile, falling from 77.65 to 77.13 around the statement but surging to 77.80 after Draghi. AUD mimicked the EUR, rising from 1.0270 to 1.0380 before plunging to 1.0155. NZD rose from 0.7800 to 0.7879 and then fell to 0.7711. AUD/NZD remained stuck inside 1.3150-1.3185.

AUD/USD and NZD/USD outlook next 24 hours: The outcome of the week’s second key global event – the EU Summit – should be known tonight, and markets will view it as the last chance for officials to prevent the crisis from shifting to a more worrying state. AUD formed a technically bearish outside-down day, suggesting a break below 1.0150 support is likely today. NZD formed a similar technically bearish pattern, and broke below its recent consolidation range, now targeting 0.7665 next. NZ retail and consumer confidence data today will have minor impact only.

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