Morning FX thoughts - 2 Nov'11

Westpac Global Markets Strategy Group

Wednesday 2nd November 2011

Risk aversion rises. Risk markets fell sharply as jitters regarding the Eurozone rescue accentuated.

The Greek prime minister’s surprise call yesterday for a national referendum on the recently agreed aid package raises the risk of a disorderly default, and indeed of an exit from the Eurozone. That said, his grip on the government appears to loosening, with one party member defecting yesterday, and a confidence vote in store, so the prospect of a referendum is uncertain.

Further bearish news came from the weaker China PMI yesterday, sub-consensus US PMI, and a WSJ report that MF Global (which filed for bankruptcy yesterday) has misused hundreds of millions of dollars.

The Eurostoxx 50 gapped 5.3% lower, the S&P500 is currently 1.9% lower, and the VIX index of risk aversion gapped 5ppts higher.

Commodities followed suit, the CRB index down 1.8%, oil -1.9%, and copper -3.7%. US 10yr treasury yields are 8bp lower at 2.04% having touched 1.95% early NY.

The Greek 10yr rose 141bp, and the Italian, increasingly under the spotlight, rose 35bp.

The US dollar index surged around 1.5%. EUR fell from 1.3820 to 1.3609 but partly recovered to 1.3750 on the possibility a Greek referendum may not be held after all.

USD/JPY did little between 78.00 and 78.46. AUD continued its domestic session fall, aided by the RBA’s 25bp rate cut, from 1.0440 to 1.0271 but partly recovering late NY to 1.0380. NZD fell from 0.8080 to 0.7920 and firmed late to 0.7980.

The Fonterra auction had no market impact, prices overall down 1.2%. AUD/NZD recovered most of its post-RBA fall, firming from 1.2940 to 1.3020.

AUD/USD and NZD/USD outlook next 24 hours: Eurozone headlines will again dominate the day ahead until the FOMC meeting (5:30am NZT tomorrow). AUD’s corrective rally since 4 Oct looks complete and a large downward leg is probably developing, targeting sub-1.0000. Near-term, a minor bounce to 1.0450 is likely. It’s a similar story for the NZD, a bounce to 0.8040 likely near-term before a large decline to the low 70’s.

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