By Kymberly Martin
The USD was once again broadly weaker overnight. The CAD was the top performer.
The ECB left rates unchanged overnight and President Draghi expressed commitment to implementing the Bank’s full QE programme. The EUR experienced some volatility around the meeting and associated Draghi comments but trades higher this morning at 1.0680.
However, the star performing currency overnight was the CAD. It gapped higher as the Band of Canada left rates unchanged at 0.75% this morning. This was in line with consensus expectations but likely caught out some market participants who saw some chance of a cut. The CAD has gained around 2% versus the USD. From 1.2550 the USD/CAD now trades at 1.2320, its lowest level since mid-Jan.
Yesterday, the Bank of Japan’s Kuroda expressed some cautious confidence its easing policies were having the intended effects. He still has a move in Japan inflation back to 2% in his sights. It did not sound like a central bank on the verge of further easing. The USD/JPY has fallen from early evening highs around 119.70 to trade at 119.00 currently.
Sentiment toward the USD was not helped overnight by the latest in a line of recent US data disappointments. This time it took the form of March industrial production. The USD index trades a little lower at 98.40 this morning.
NZD/USD and AUD/USD have pushed higher in the early hours of this morning. Although the overnight GDT dairy auction showed a further 3.6% fall in average prices the market appears almost relieved it wasn’t worse, after the 11% fall at the previous event.
The NZD/USD poked its head above 0.7600 early this morning and we used it as an opportunity to implement our short NZD/USD recommendation ahead of next Monday’s Q1 CPI print. We expect this to come in at just 0.1%y/y and likely encourage the market in its pricing of RBNZ rate cuts. The market is currently pricing 29bps of RBNZ cuts for the year ahead. We do not expect cuts but believe it may be some time before the market comes around to our point of view.
In the meantime we target a move in the NZD/USD down to 0.7200, in the first instance. Our end year target remains 0.7000.
Also keep an eye out for a speech by RBNZ’s Assistant Governor McDermott next Thursday on inflation. This will be a hot topic so close to the next OCR review (30 April). It has some potential to pour cold water on expectations for rate cuts based on current low-side inflation readings, as the Bank looks to the medium-term outlook for the economy where some inflationary indicators are apparent. This will be particularly interesting following yesterday’s RBNZ speech on housing risks.
The NZD/AUD traded as high as 0.9920 early last evening, but has traded down to 0.9880 currently. The test for the cross today will be the AU employment report. Our NAB colleagues are aligned with consensus in looking for 15k additions to employment.
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