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Forex Blog - Morning Report (Westpac)
Morning Report Thursday 4 November 2010
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The US central bank said it intends to purchase an additional $600bn of longer term treasury securities by Q2 2011 at a pace of around $75bn per month, close enough to market expectations. It added the pace of purchasing will be regularly reviewed if the economy slow further, leaving the door open for even more QE. Markets were volatile and mixed ahead of the FOMC meeting. The S&P500 was down 0.3% before the release, despite stronger US data including the private ADP measure of employment, and was little changed immediately afterwards, although later volatility has the index up 0.4%. The CRB commodities index was flat, oil up 0.9%, but minor reversals in copper (-1.2%) and gold (-1.4%). US 10yr treasury yields were 5bp lower at 2.54% before FOMC, but are now at 2.63%, perhaps on profit-taking, while the 30yr yield was hurt by inflation concerns, up 15bp. Eurozone peripheral government bonds weakened further, particularly Ireland's 10yr which rose 16bp to a new record wide over Germany of 504bp.
The US dollar index is little changed from Sydney's closing level, but was volatile around the FOMC. EUR ranged between 1.4000 and 1.4050, breaking higher to 1.4180 on post FOMC volatility. USD/JPY rose from 80.60 to 81.60 and has settled at 81.25.
AUD touched a fresh high at 1.0026 and is currently at 1.0005 after dribbling lower in Europe to 0.9940.
NZD is higher after all the volatility at 0.7775, having touched 0.7808, a fresh two-year high. AUD/NZD moved steadily lower from 1.2900 to 1.2825.
US Federal Reserve to expand asset purchases by $600bn by end June 2011. That is on top of $250-300bn of reinvestment of maturing assets by June next year. The Fed said that the pace of recovery of the economy and jobs was still slow and inflation was "somewhat low" relative to target, as justification for the $75bn per month of asset purchases. The commitment to keep the 0-0.25% exceptionally low Fed funds target for an extended period was maintained. The Fed said it would regularly review the pace of security purchases.
US ADP private payrolls grew 43k in Oct, and Sep revised up from -39k to -2k. That is the strongest ADP jobs growth since May. Given that our private payrolls forecast for Friday's BLS report is +50k, we are not inclined to change our forecast, although ADP has had a recent tendency to underperform the official jobs data. Also on the labour market, corporate layoff announcements were down 32% yr in October at 38k.
US ISM non-manufacturing survey up 1.1 pts to 54.3 in Oct. Business activity jumped almost 6 pts to 58.4, its highest since May, while orders rose nearly 2 pts to 56.7 and jobs edged up from 50.2 to 50.9, not so impressive but still back at the recent cycle high. This adds to the recent suite of business surveys pointing to better than expected growth in the US economy heading into year end.
US factory orders up 2.1% in Sep. There was a slight upward revision to the durables component from 3.3% to 3.5% and non-durables rose 0.9%, much of that due to higher energy prices.
UK PMI services up from 52.8 to 53.2 in Oct. The second rise in a row after three monthly declines suggests the economy might still be growing in the fourth quarter, despite the aggressive budget cuts announced by the new government. However the business expectations index fell. In other news, shop prices accelerated from 1.9% yr to 2.2% yr in Oct, a sign that CPI inflation, at 3% yr or higher all year so far, is not about to fall.
AUD/USD and NZD/USD outlook next 24 hours: Australian retail sales will be watched by AUD traders, the currency retaining a firm tone. Support today is at 0.9900 for a move to fresh highs. Similarly, NZD should challenge 0.7800 en route to 0.8000 in coming sessions, but looks in need of an intraday correction, support at 0.7640. NZ's unemployment rate today will be watched.
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