The USD DXY index is up 0.6% on the day and is now up around 2% from the multi-year lows reached in late January; NZD is back down to around 0.7260; EUR has fallen to a 2 week low against the USD

By Nick Smyth

In FX markets, the USD is stronger across the board.  The Bloomberg DXY is up 0.6% on the day and is now up around 2% from the multi-year lows reached in late January.  There was no real catalyst for the move although we have been highlighting the very negative sentiment towards the USD of late and the accompanying build-up in short positions (especially against the EUR).  It seems reasonable to assume that the dollar is benefitting from short covering. 

The EUR has fallen to a 2 week low against the USD, at around 1.2270.  The announcement that Merkel’s CDU and the SPD had reached a coalition agreement didn’t help the EUR.  The agreement, which sees the SPD getting the Finance and Foreign Ministry posts, will now be put to the 400,000+ rank and file members of the SPD for a vote.  That’s not guaranteed, as many SPD party members blamed their poor election result (their worst showing since WWII) on their role as junior coalition partner in the last Grand Coalition.

Against a backdrop of USD strength overnight, the NZD is back down to around 0.7260.  Falls in commodity prices overnight (oil is down around 2% and most hard commodities are lower too) probably contributed to NZD’s decline (it is the second worst performing currency over the last day). 

Yesterday, the NZD had risen to 0.7350, up almost half a cent, after the NZ labour market data showed a small decline in the unemployment rate to 4.5% (in line with our expectations but better than the market consensus).  But the NZD gave up those gains over the course of yesterday, with market commentators highlighting the weaker than expected wage data contained in the labour market report (0.4% vs 0.5% expected for 4th quarter).  New Zealand, like many countries globally, is experiencing lower wage pressure than historical relationships with unemployment rate would suggest.  Local rates markets hardly reacted to the labour market data, and the swaps curve flattened in sympathy with the decline in yields offshore.  Attention now turns to the RBNZ MPS this morning.  

In the coming day, the BoE releases its Inflation Report and rate decision.  While the BoE is universally expected to keep the Bank Rate on hold at 0.5% the market will be focused on any signals on the timing of the next hike (the May meeting is 50% priced by the market).  RBA Governor Lowe gives a speech tonight ahead of the Statement of Monetary Policy tomorrow. 

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