GO Markets FX Commentary - 2nd June 2011
Aussie dollar performance
After a solid performance domestically, the Aussie dollar has taken a hit overnight coinciding with a steep drop in US equity markets, broad based losses across the commodity space and another Greek downgrade for good measure. Higher yielding assets were unwound after economic reports for the US continued to paint an uninspiring economic outlook. US markets were already jittery ahead of Friday's jobs data; however a less than convincing ADP employment reading and a separate survey suggesting more planned job cuts only served to heighten these concerns. To add fuel to the fire the ISM manufacturing data came in well below expectations dropping to an index level of 53.5 in May against the economist's estimates of 57.2. The $A dropped over two big figures with price action falling to lows of 105.93 US cent from highs of 107.53 yesterday with a similar theme plaguing risk currencies across the board.
Meanwhile, ratings agency Moody's was on the war path once again with yet another downgrade of Greece debt by 3 notches citing the greater likelihood of a debt restructure. Recent times have seen the Greek debt debacle turn a darker shade of brown amid continuing concerns of an imminent default of the Euro-zones most indebted nation. Perhaps one of the best barometers of how investors view the economic uncertainty of Europe's peripherals would be to look at the differential in debt yields between the Euro-zones star economy, Germany, against its wayward siblings. At the time of writing the ten year yield of Greece is sitting around 16.332% while Germany is at 2.972% which represents a yield differential of 1,336 bps. Yields of a two year maturity further highlight the divide between Germany and Greece with a differential of over 24% in recent times. Quite simply the greater the perceived risk in a country, demand for their debt declines and yields increase, forcing the government to borrow at exorbitant and unsustainable rates.
The decidedly risk-off attitude boosted the greenback against risk currencies however the stage belonged to the in-form safe haven the Swiss franc with the USDCHF pair hitting a fresh all-time low of CHF 83.32 early in US trade. This unwinding of risk assets also supported the Japanese Yen with the USD pair dropping through ¥81 and is currently trading around the ¥80.9 levels.
Market moving themes in the day ahead will see the release of Trade balance data and retail sales for April which will no doubt promote volatility on the Aussie dollar ahead of next week's RBA rates decision. At the time of writing the Aussie dollar is buying 106.2 US cents.
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