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USD strengthened across the board after the Fed minutes but it has given up most of those gains overnight; ECB will probably announce an end to QE in September; NZDUSD similar to where it was this time yesterday, NZDAUD has fallen a little overnight

Currencies
USD strengthened across the board after the Fed minutes but it has given up most of those gains overnight; ECB will probably announce an end to QE in September; NZDUSD similar to where it was this time yesterday, NZDAUD has fallen a little overnight

By Nick Smyth

The US stock market reacted negatively to the release of the Fed minutes and the move higher in Treasury yields. The S&P 500, which had been up 1.2% on the day, fell sharply to close down 0.6%. As with the bond market, US stocks have recovered overnight, with the S&P 500 up around 1%. 

The US dollar strengthened across the board after the Fed minutes but it has given up most of those gains overnight. The EUR reached a low of 1.2260 overnight but it has since recovered to 1.2330, similar levels to this time yesterday. The ECB minutes overnight noted that " some members expressed a preference for dropping the easing bias" for QE (i.e. that QE can be increased if conditions worsen), but this was judged premature.   In one of the next few meetings, the ECB will probably announce an end to QE in September (QE is currently scheduled to run until September, “or beyond, if necessary”). The EUR has risen since the release of the ECB minutes, although broadly in line with other currencies against the USD.  Bund yields have been reasonably stable since the ECB minutes were released. 

European Commission President Junker warned of possible volatility in financial markets due to the upcoming election in Italy (4th March) and the SPD’s internal vote on the proposed coalition agreement with Merkel’s CDU. Pollsters report that the proportion of undecided voters for the Italian election is very high (30%-45%) and there is no party with a clear majority. Italian bond spreads have started widening against German bunds the last few weeks, although they remain towards the tight-end of the range seen the past 12 months. 

UK GDP was a bit softer than expected overnight, although it didn’t have much impact on the GBP.  Theresa May’s divided cabinet meets shortly to agree on a strategy for post-Brexit relations with the EU. The near-term focus for the market is on a transitional deal between the UK and EU, which they hope to agree before the end of March (we expect a transitional deal to boost the GBP and help NZD/GBP move lower this year). 

The NZD is just below 0.7350, similar to where it was this time yesterday. The NZD/AUD has fallen a little overnight, to 0.9360, although it remains near to 6 month highs. In the day ahead, we receive NZ retail sales where we are looking for an above consensus 1.7% increase. 


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