By Kymberly Martin
In the backdrop of improved market sentiment the JPY and EUR underperformed a stronger USD overnight, while the NZD and AUD consolidated after gains yesterday.
European equity markets pushed higher, credit spreads narrowed and the oil price made a modest gain in quieter low-volume markets as the US celebrated President’s Day.
Early this morning ECB President Draghi spoke to the European Parliament. Headlines captured his now regular mantra that the ECB “will not hesitate to act”.
However, action was made conditional on either of two factors creating downward risk to price stability i.e. (i) financial market turmoil impacting on the transmission mechanism of the financial system (ii) low imported inflation, especially as impacted by declines in global oil prices.
He attempted to draw a line under recent falls in European banking sector equities. He said that regulatory overhaul since the start of the crisis had increased resilience of “not only individual institutions but also of the financial system as a whole.”
The Euro Stoxx 50 closed up a further 2.8%. The EUR/USD was on a steady decline for most of the night, with the move extending, post-Draghi’s comments. From 1.1240 last evening the EUR/USD now sits at 1.1140.
The JPY was the victim of improved risk sentiment, its ‘safe haven’ appeal fading. From 113.40 the USD/JPY now trades at 114.60. It has experienced more than a 3% bounce over the last couple of days, but remains well down on early February highs, highlighting current volatility.
The Japanese Topix index made an impressive 8% bounce yesterday, in keeping with its frequent inverse correlation with the JPY.
The NZD/USD and AUD/USD made their gains during the day yesterday, consolidating overnight.
The NZD/USD traded up to 0.6670 by last evening, trading close to this level for much of the night. Only in the last few hours has it dropped off to trade at 0.6660 currently.
The next real test for the currency will likely be the GDT dairy auction in the early hours of tomorrow morning. We anticipate a weak result with a fall in overall prices in the order of 10%. This would likely take a toll on the NZD/USD. Also keep an eye out for today’s NZ Q4 retail sales report.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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