Morning FX thoughts - 8 Aug '11

Monday 8th August 2011

Markets were extremely volatile in London and NY, a bombshell announcement of a US sovereign rating downgrade coming after the close.

During trading hours, a positive surprise from the US payrolls report helped lift risk sentiment around midday London, but the mood was soured as rumours of an imminent US downgrade began to circulate. Speculation later that the ECB may start buying Italian and Spanish bonds, subject to conditions, boosted sentiment again only for the downgrade rumours to gather momentum. The S&P500 consequently closed unchanged but traded in a large 4.6% range.

US 10yr treasury yields were similarly volatile but in an upward direction, from a 2.34% low around the Sydney close to 2.58% near the NY close. This rise may be extended today when markets react to the downgrade. Standard & Poor’s revised the US rating from AAA to AA+ with a negative outlook, meaning another downgrade is possible within two years.

The US dollar index slipped throughout the London and NY sessions, and will probably continue doing so today. EUR outperformed on the expectation of ECB buying (an emergency meeting was held last night), rising from 1.4073 to 1.4298, and opens this morning higher to 1.4397. USD/JPY sat around 78.50 on Friday but dropped to 77.58 this morning. USD/CHF made a fresh record low of 0.7579 on Friday, followed by another this morning at 0.7485. AUD fluctuated wildly between a Friday high of 1.0528 and a four-month low of 1.0376, closing mid-range. It opened weaker this morning to 1.0378 and is trading at 1.0415 as we write. NZD also fluctuated in an ascending range to 0.8467 and opened slightly weaker to 0.8383, trading at 0.8405 as we write. AUD/NZD slid from 1.2500 to 1.2350.

AUD/USD and NZD/USD outlook next 24 hours: The US downgrade should pressure the USD lower today, benefitting safe havens yen and Swiss franc, but any adverse reaction from global equity markets will be AUD and NZD negative. Other major events to navigate will be possible confirmation of bond-buying by the ECB and, according to the well-placed Nikkei, possibly a coordinated G7 statement supporting the USD and EU fiscal efforts today. AUD is testing major support at 1.0380, a break pointing to 1.0260. NZD has trend support (from March) at 0.8380, a break pointing to 0.8180.

Source: Westpac Global Markets

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