Morning FX thoughts - 25 Aug '11

Thursday 25th August 2011

Risk appetite firmed again benefitting equities, although currencies and commodities were less convinced.

Sentiment was subdued until US data releases (durable goods and house prices) beat expectations, pushing US equities into the green. The S&P500 is currently 1.3% higher, the Eurostoxx 50 earlier closing up 1.8% although Asian equities closed weaker.

The CRB commodities index is down 0.9% (forming a technically bearish key reversal day), oil down 0.4%, copper unchanged, while gold is continuing the previous day’s unwind to be 3.9% lower.

The 10yr US treasury yield is 12bp higher at 2.28%, possibly affected by opinion pieces from the Washington Post and an advisory firm suggesting no new policy initiatives will be announced this Friday. A 5yr auction went well, awarded at market with an above average 2.7 bid-cover ratio. Greek 10yr yields rose 47bp and 2yr yields rose 442bp to a record high as demands for collateralised lending grow.

The US dollar index is slightly firmer but remains rangebound. EUR is little changed, bouncing from 1.4380 to 1.4482 and then paring gains in NY. ECB emergency lending was at a two-week high last night, illustrating funding pressures remain.

USD/JPY bounced around midday London from 76.48 to 77.08. AUD rose from 1.0447 early London and peaked with equities at 1.0523 at the NY open, but then diverged to pare all gains. Underperformer NZD peaked at 0.8324 and returned to the 0.8260 area. AUD/NZD ranged between 1.2625 and 1.2670.

AUD/USD and NZD/USD outlook next 24 hours: AUD’s performance is disappointing given the US equities rally, and it looks vulnerable. A break below an hourly neckline at 1.0450 immediately targets 1.0350. NZD should be capped at 0.8380. NZ Q2 retail sales today has been superceded by higher-frequency series, but will be worth watching.

Source:Westpac Global Markets Strategy Group

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