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European markets fall on release of weak UK data, rate cut comments from Bundesbank President and rumours of German downgrade

Posted in Currencies

By Kymberly Martin

NZD

The NZD/USD declined overnight as broad risk appetite waned. It sits at 0.8440 this morning.

Yesterday’s NZ CPI data came in on our expectations at 0.9%y/y. This remains right at the bottom of the RBNZ’s target range.

However, contributing to the low reading was a 1.1%y/y fall in tradable prices (partly reflecting NZD strength). Non-tradable prices actually rose 2.4%y/y.

The data did not significantly impact on the market’s pricing of around a 50% chance of a hike from the RBNZ by March next year.

It was not until later in the evening that the NZD/USD began to slide. Broad souring of sentiment saw the ‘risk sensitive’ NZD shunned in favour of the USD and JPY.

The NZD/USD slipped from 0.8490 to trade at 0.8440 currently. The NZD/JPY found support at 82.00 early this morning before climbing to trade back at 82.60.

Following reported ‘rate cut comments’ from Bundesbank President Weidmann the NZD/EUR moved higher early this morning. It trades at 0.6480 currently.

The NZD/AUD made a gallant attempt to break higher overnight, before finding resistance above 0.8210. It trades at 0.8190 this morning.

Ultimately we see the NZD/AUD moving higher into year-end based on supportive growth and interest rate differentials. For now, significant resistance remains at the mid-February highs of 0.8230.

Today, ANZ NZ consumer confidence will be released while across the Tasman the NAB Quarterly Business survey will be delivered.

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Majors

As risk aversion returned overnight the USD was stronger against all its peers. European currencies were the weakest performers.

Our risk appetite index (scale 0-100%) slipped back from 75 to 67% overnight. The Euro Stoxx 50 declined 2.1%.

In fickle markets the precise catalyst is not always obvious. There were unsubstantiated rumours of a German rating downgrade.

Bundesbank President Weidmann was also reported as saying the ECB may cut interest rates if data warrants.

Later, the progression of the US Q1 earnings season loss some of its gloss. Bank of America earnings disappointed, amongst others.

In this backdrop the USD was the key beneficiary of ‘safe haven’ flows. The USD index surged from 81.80 to around 82.70.

In its Beige Book survey of the economy the Fed said the economic expansion remained “moderate”. Gains in manufacturing, housing and autos offset weakness in defence-related industries.

The EUR/USD slipped from overnight highs close to 1.3200 to trade at 1.3030 this morning. Much of the loss occurred after the reported Weidmann comments.

The GBP was also weaker overnight. It incurred most of its losses after weak UK labour data. This included the unemployment rate ticking up to 7.9% (7.8% expected) in February.

However, as expected, release of Bank of England Minutes showed that members voted 6-3 against increasing quantitative easing for now. The GBP/USD slipped from 1.5360 to 1.5240.

The other Central Banks in the spotlight overnight were the Bank of Canada and Swedish Riksbank. The BoC left rates unchanged at 1.00% as widely expected, but downgraded its growth forecast to 1.5% for 2013. It stated “a material degree of slack has re-emerged in the Canadian economy”.

The Riksbank left rates unchanged, but pushed back the proposed start to its rate tightening cycle until the second half of 2014. This was deemed necessary to ensure inflation moves back toward target in the face of a strong Krona. The Krona fell 2.30% on the announcement relative to the USD.

Across the Tasman the key data release today will be the NAB Quarterly Business Survey. Tonight, UK retail sales data will be released.

Spain will also sell bonds, a good barometer of current appetite for peripheral European debt. Tonight, there is an array of US Fed speakers scheduled, with the key US data point being the Philadelphia Fed business outlook survey.

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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