Morning FX thoughts - 31 Jan '12

Westpac Global Markets Strategy Group

Tuesday 31st January 2012

The bears had the upper hand last night. The S&P500 is currently down 0.8% but was 1.4% lower early in the NY session and has broken technical channel support dating from 21 December. The main driver appeared to be Greece’s rejection of a proposal to appoint an independent fiscal overseer, the FM firmly opposed to effectively ceding its sovereignty.

Markets were also frustrated by no visible progress on the Greek-bondholder negotiations and noted Spain’s Q4 GDP print of -0.3%. Portugal’s 10yr government bond yield surged 217bp to 17.39% - a fresh record – on expectations of a Greek-style default and writedown. Markets partially recovered during the NY afternoon when the EU summit produced agreement on a July start date for the ESM permanent bailout mechanism. US 10yr treasury yields were heavy throughout, extending Asia’s decline by 7bp to 1.81%.

The US dollar index is around 0.5% higher. Underperformer EUR extended losses after Sydney closed from 1.3180 to 1.3077 but rebounded to 1.3140 on the ESM news. Safe-haven yen buying helped it outperform and pushed USD/JPY from 76.76 to 76.22. AUD fell from around 1.0600 to 1.0527 in London but rebounded completely in NY. NZD fell from 0.82110.8156 but rebounded to 0.8207. AUD/NZD bounced from 1.2880 to 1.2930.

AUD/USD and NZD/USD outlook next 24 hours: Australian private sector credit, business confidence and house prices are second-tier for markets. AUD’s reversal from an overbought state may be an early sign of lower to come although there’s no technical confirmation of that yet. Support today is at 1.0525. NZD’s upward channel remains intact despite a reversal from an overbought state, support today at 0.8150. NZ building permits today is minor.

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