ECB focused on problem of low inflation. But Bundesbank thinks low oil prices 'more of an economic stimulus than harbinger of deflation'

By Kymberly Martin

On Friday the EUR underperformed while the AUD was the strongest performer amongst its major peers.

The EUR was under renewed pressure on Friday night as ECB President Draghi said that policymakers would “do what we must to raise inflation as quickly as possible”. That catch-phrase was prefaced with; “If we decide that the current trajectory of our policy is not sufficient to achieve our objective…” The EUR declined, as an expansion of ECB easing at the Bank’s Dec meeting looks likely. The EUR/USD traded down from above 1.0720 to end the week close to 1.0650.

However, Bundesbank President Jens Weidmann, speaking at the same conference, said that the fall in crude oil prices was “more of an economic stimulus for the euro area than a harbinger of deflation”, and that he saw “no reason to talk down the economic outlook and paint a gloomy picture”.

CFTC speculative positioning data, released on Friday, showed that EUR net shorts extended from 142.9k to 164.2k (though this remains well below the record short position of 226.6k reached in March this year).

The decline in the EUR on Friday night also dragged down most of its European peers. The GBP/USD traded down from late evening highs above 1.5300, to end the week at 1.5190.

By contrast, the AUD was the strongest performer on Friday night, extending its gains since Thursday morning. Sentiment toward the AUD was likely helped by stabilisation in commodity and equity prices on Friday night. From early evening lows near 0.7190, the AUD/USD ended the week at 0.7240.

The CFTC speculative data showed net AUD short positions extended significantly, from 52.8k to 66.5k. This puts it in ‘extreme’ territory, suggesting the AUD is more vulnerable to short-term bounces on less-than-negative data flow. However, over the medium-term we still see further downside for the AUD/USD.

The NZD/USD traded a fairly unexciting path sideways on Friday night, between 0.6550 and 0.6590. On the crosses, the NZD rebounded versus its European peers, but retreated against the AUD. The NZD/AUD slipped from 0.9160, to end the week around 0.9070. The cross is now back within its fundamental ‘fair value’ range that we calculate to be between 0.8960 and 0.9250. Support for the NZD/UAD will be encountered on any move toward 0.9000. Resistance is eyed at 0.9160.

Look out for NZ net migration data today and Eurozone and US PMI data tonight.

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