Morning FX thoughts - 07 Oct '11

Westpac Global Markets Strategy Group

Friday 7th October 2011

Central bank support gave risk sentiment a boost. The ECB disappointed some expecting a rate cut, but delivered unconventional stimulus via covered bond purchases and reintroducing 12 month loans to banks. Intensified downside risks to growth were noted and a rate cut was debated but inflation risks were deemed balanced, leaving the door open to a cut at some point.

The BOE announced its second round of quantitative easing earlier and larger (GBP75bn) than expected. The combined effect was to boost sentiment globally, helping the Eurostoxx 50 close 3.2% higher and the S&P500 to be up 1.4% as we write.

US jobless claims data just beat consensus, adding to market tone. The CRB commodities index bounced 2.0%, oil +3.7%, copper gapping +5.1%, and silver +5.3%. US 10yr treasury yields rose 9bp to 1.98% while 2yr yields rose 1bp. Eurozone peripheral yields were fairly stable..

The US dollar index slipped amid the positive risk sentiment. EUR fell from 1.3400 to 1.3242 around the ECB meeting, but the press conference later which announced the stimulus measures seemed to provide a base for a rally to 1.3450. The debasing effects of quantitative easing saw GBP fall from 1.5500 to 1.5272 but it rebounded to 1.5448 on the improvement in risk sentiment. USD/JPY remained consolidative between 76.57 and 76.84. AUD rose from 0.9656 to 0.9768 with much volatility in between. NZD similarly rose from 0.7630 to 0.7726. AUD/NZD rose from 1.2620 to 1.2660.

AUD/USD and NZD/USD outlook next 24 hours: Tonight’s US payrolls report is the main event risk. AUD’s corrective bounce should continue today to around 0.9910. Similarly, NZD can proceed to its next upside target in the corrective phase to 0.7890.

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