Morning FX thoughts - 3 Nov'11

Westpac Global Markets Strategy Group

Thursday 3rd November 2011

Some stability. Risk markets stabilised after sharply falling from Monday as Greece clarified its position regarding the rescue package.

The Greek PM’s personal call for a referendum on compliance was endorsed by his cabinet and a confidence vote will take place on Friday evening. While hardly a catalyst for risk-seeking, there is at least less uncertainty.

Helping the consolidative tone was an above-consensus US private payrolls report. The above was balanced by news the EFSF rescue fund delayed its fourth bond issue (EUR13bn 10yr) due to market turbulence, as well as the lack of any fresh stimulus from the US central bank’s meeting (FOMC) this morning.

There was no signalling of mortgage-backed bond purchases or even a strengthening of the rates-guidance language (although Fed Chairman Bernanke left the door open for both at the press conference), and disappointed markets softened in response.

The S&P500 is currently up 0.9% (from +1.3% midday NY). Commodities overall (CRB index) are little changed, as are US 10yr treasury yields at 2.00% (from 2.07% earlier).

The US dollar index is slightly weaker amid the decline in risk aversion. EUR rose from 1.3713 to 1.3829 by midday NY and then slumped back to 1.3713 post-FOMC. USD/JPY was stuck in a narrow 77.04-78.13 range.

AUD firmed to 1.0428 during the London morning but fell to 1.0289 post-FOMC. Underperformer NZD managed a 0.7982 intraday high before slumping to 0.7867. AUD/NZD rose from 1.3040 to 1.3100.

AUD/USD and NZD/USD outlook next 24 hours: Tonight’s ECB meeting is important, with the potential to boost to risk sentiment if rates are cut. Ahead of that, AUD may test 1.0270 (1 Nov low), and NZD may test 0.7870. This morning’s NZ employment report has the potential for a surprise either way, though, and there is Australian retail sales to watch later on.

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