ECB to do whatever it takes to preserve the euro

by Kymberly Martin

NZD

The NZD/USD was the strongest performing currency over the past 24-hours, trading back up at 0.8020.

The NZD was underpinned by a steady statement from the RBNZ yesterday. While obvious global risks were acknowledged underlying inflation was, ”expected to settle near the mid-point of the target range over the medium term”. The OCR was therefore seen as appropriate at 2.50% for now.

Overnight, the NZD then took flight as risk appetite surged after supportive comments from ECB President Draghi (see Majors).

The NZD/USD is up 2.20% over the past 24-hours. This takes the currency to the upper edge of its trading range it has maintained since mid-June.

We expect in the absence of further hard evidence of ECB action to follow up recent comments, the NZD/USD will continue to contained within its recent range. We see near-term resistance at 0.8080, and support at 0.8000.

Despite a strong EUR overnight, the NZD/EUR followed a rocky path higher. Having found support at 0.6500 this cross now trades back around overnight highs of 0.6530.

The NZD/AUD had a leg up early yesterday morning after the RBNZ announcement failed to indulge market expectations of further RBNZ rate cuts. However, it was fairly steady trading thereafter until general market sentiment improved overnight. The NZD then gained the upper hand with the cross trading to above 0.7710 currently.

Today, a follow through of improved sentiment in Asian equity markets will likely support the NZD and AUD.

Tonight, all eyes will be on the release of US Q2 GDP. The market will also be looking out for further hints of policy action from the Eurozone.

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Majors

As risk aversion fell away overnight, the ‘safe haven’ USD and JPY were the weakest performers and the ‘risk sensitive’ NZD the strongest.

ECB President issued fighting words suggesting sovereign risk premia were hampering the proper functioning of the monetary policy mechanism.

In essence, this provided an alibi for the “ECB to do whatever it takes to preserve the euro”. He added, “believe me, it will be enough”.

Showing just how negative and fickle markets have become, this was enough to light a rocket under many markets. In equity markets the Euro Stoxx 50 closed up 4.3% with a 6.0% return from the Spanish IBEX 35.

Non-core European bond yields plunged. The EUR burst from below 1.2150 to trade around 1.2280 currently.

Conversely the USD fell from favour. The USD index fell rapidly from above 83.60 to 82.80. Demand for the ‘safe haven’ JPY also evaporated.

The JPY was the only currency to marginally under-perform the USD. The USD/JPY crept up from around 78.10 to 78.20.

However, it was the ‘risk sensitive’ AUD and NZD that were the greatest beneficiaries of the more buoyant mood overnight. The AUD/USD rose rapidly to retest resistance around the 1.0430 level. The currency currently sits just below 1.0400.

There is little in the way of data releases in the Asian session to impact on market sentiment. Tonight, all eyes will be on the US release of Q2 GDP. A 1.4% q/q annualised outcome is expected versus 1.9% in Q1.

An outcome at least in line with expectation could help underpin the current ‘risk on’ mood and reduce demand for the USD.

However, in order for the current improved mood to be maintained, ECB words will need to be followed with action before too long. Next Thursday’s ECB meeting looms large.

Other news: US durable goods orders-ex-transportation, 1.1% vs. 0.1%; US jobless claims, 353k vs. 380k; US pending home sales, -1.4%m/m vs. 0.3%

Event Calendar:
27 July: EU German CPI; US Q2 GDP; US Michigan consumer confidence.

All its research is available here.