RBNZ rate cut impact on NZD short lived; European credit spreads narrow on improved sentiment; Brexit fears less acute; AUD may be sold-off on release of weaker Chinese data

By Kymberly Martin

“Commodity-linked” currencies led gains against the USD on Friday, while the JPY underperformed.

Trading in many currencies was much more pedestrian on Friday, after the high drama of currencies’ responses to Thursday’s ECB announcement.

Sentiment in markets generally improved, as a 6% rise in European financial sector companies led the Euro Stoxx50 to a 3.5% gain.

There was also a marked narrowing in European credit spread proxies. Our global risk appetite index pushed above 40% for the first time this year. The EUR/USD held onto most of its post-ECB gain. After an intra-night dip, it ended the week at 1.1150.

The GBP/USD gained a boost in the early hours of Saturday morning, extending its rebound since end-February, as ‘Brexit’ fears have become less acute. However, Wednesday’s budget speech by Chancellor of the Exchequer, Osborne, may be the next challenge for the GBP.

If further plans for austerity are highlighted, the GBP may find it more difficult to maintain its momentum. The GBP/USD ended the week at 1.4380.

The NZD/USD has regained much of its post-RBNZ-surprise plunge, illustrating the often short-lived impact of such events on currencies. After flirting with the 0.6700 level for much of Friday afternoon and evening, the NZD/USD finally broke through this level early on Saturday morning. It ended the week at 0.6750.

The AUD/USD also made gains on Friday, in the backdrop of generally higher commodity prices. The broad CRB global commodity index closed up almost 1.0%.  The AUD/USD ended the week above 0.7560, its highest level since early-July last year.

Sentiment toward Australasian currencies may be a bit less warm this morning after the release of scheduled Chinese data over the weekend. February industrial production fell to 5.4% y/y, down from 6.1% in January.

Retail sales growth fell to 10.2% from 10.7%. It’s possible that lunar New Year effects were not adequately accounted for in seasonal adjustments, but markets are likely to take the data at face value. They may be viewed with concern relative to China’s 6.5-7% full year GDP target.  Partially offsetting this concern, China’s fixed asset investment growth rose to 10.2% from 10.0% in February.

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Kymberly Martin is on the BNZ Research team. All its research is available here.