NZD holds the 0.70 level against the mildly higher USD and is slightly lower against the AUD at the 0.9150 level; EUR under pressure as investors lose confidence in ECB changing accommodative policy, down from 1.09 USD to 1.07 USD in three days

By Jason Wong

The USD is showing further signs of consolidation after its mid-month tumble, rising by about 0.3% on the key indices, while equity markets and US Treasury yields are slightly higher.

EUR remains under pressure as investors lose confidence that the ECB is about to change its accommodative policy stance anytime soon.  Following yesterday’s Reuters report that unnamed officials said the market had over-interpreted its intent to withdraw monetary stimulus, inflation data in Germany and Spain were much weaker than expected.  Germany’s annual CPI inflation fell to 1.5% in February from 2.2%, while in Spain inflation dropped form 3.0% to 2.1%.  The ECB’s Governing Council member Liikanen commented that the euro area is still in need of “a very substantial degree of monetary accommodation for underlying inflation pressures to build up and support inflation in the medium term.”

EUR trades this morning below the 1.07 mark, after trading at its highs for the year above 1.09 just three days ago.  Euro area inflation data tonight are expected to show headline inflation dipping from 2.0% to 1.8% and core inflation retreating to 0.8% from 0.9%, data which are consistent with the view that the ECB will be in no hurry to remove monetary stimulus.

The third estimate of Q4 US GDP was revised a touch higher to an annualised 2.1%, driven by an upward revision of private consumption to a healthy 3.5%.  Timelier February data in the form of personal income and spending are released tonight, along with the latest PCE deflators.  Core PCE inflation likely remained stuck at 1.7% yoy.  Any upside surprise here would help fuel expectations for another Fed hike, perhaps as soon as June, and help boost the USD.

There was a temporary blip down in the USD as CNBC reported that the Trump administration was assessing the scope of its power to penalise countries whose currencies it says are undervalued.  President Trump’s economic team is looking at alternative strategies to crack down on what he calls unfair trade.  The market is nervous about a trade war, with the US at the centre of it, but that news report was quickly brushed aside.

Some broadly-based USD strength sees the NZD just holding above the 0.70 mark, near the bottom of the 1-cent range it has traded within the past couple of weeks.  Today sees the release of the ANZ business outlook survey, which is expected to show decent levels of confidence and another tick up in inflation expectations.  The NZD has slightly underperformed the AUD which sees NZD/AUD probing the 0.9150 level.  The soft EUR sees NZD/EUR up to 0.6550.

Triggering Brexit has done GBP no harm, as it is one of the few currencies to have made ground against the USD, and trades at 1.2475.  PM May’s Brexit letter noted that the UK’s cooperation on security matters could be tied to any free trade deal.  This is one of the few bargaining chips the UK has and this has got the attention of the media and the market.

Some USD recovery and higher US Treasury rates see USD/JPY nudging up towards the 111.50 mark, well up from the 110.20 low a couple of days ago.  NZD/JPY is steady around 78.

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