Morning FX thoughts - 2 Feb '12

Westpac Global Markets Strategy Group

Thursday 2nd February 2012

Risk sentiment improved, supporting all the major asset classes. Improved economic data certainly helped, starting with the consensus-beating Chinese manufacturing PMI and then including a stronger UK manufacturing PMI and US ISM manufacturing survey.

In Euroland, EU President Rompuy declared the Eurozone debt crisis had reached a turning point, citing the recent reversal in peripheral bond yields.

German Chancellor Merkel is reportedly about to ask China to contribute to the temporary EFSF rescue fund and the IMF, and there was chatter the EFSF and permanent ESM fund would run together for a while. Rumours of an imminent deal between Greece and its bondholders also circulated.

The S&P500 is currently up 1.4%, bouncing off the lower bound of an upward trend channel last night. Commodities are slightly higher overall, copper up 1.5% in response to the global data releases.

Funding pressures waned further, US 3mth Libor down 0.5bp to 0.537%. US 10yr treasury yields are 5bp higher at 1.84%, stopping at the previously broken support level. Eurozone government debt rallied, the Portuguese 10yr yield 118bp lower, Italy -277bp.

The US dollar index is 0.6% lower, trumping yesterday’s technically bullish key reversal with a bearish one. EUR similarly set up a technical bullish pattern, rising from 1.3026 to 1.3219. USD/JPY probed lower to 76.03 before the risk-on tone reversed it to 76.35.

AUD reversed early London from 1.0570 and broke higher to 1.0740 – a three month high. NZD rose from 0.8213 to 0.8357, a weaker Fonterra dairy auction ignored by the markets. AUD/NZD dribble lower from 1.2890 to 1.22850.

AUD/USD and NZD/USD outlook next 24 hours: There is the Australian building approvals and trade balance to watch today. AUD retains positive momentum and its break of 1.0690 targets 1.0755-1.0765 next, beyond which 1.0800 should be formidable. NZD has broken above its ascending channel but it remains overbought and momentum is waning, suggesting a reversal is looming. Next resistance is at 0.8380.

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