The USD has continued to strengthen over the past two days, with the Bloomberg DXY moving to its highest levels since mid-January. The reasonably sharp rise in the USD since the 17th April (BBDXY +2.5%) has coincided with the 20bp increase in the 10 year Treasury yield over that same period, suggesting interest rate differentials may have played a part in the USD resurgence. The fact that the rise in the US 10 rates over that time has been led by real yields (rather than inflation expectations) has also probably benefitted the USD. Position squaring amongst those short the USD has undoubtedly exacerbated recent moves.
Ahead of the ECB meeting tonight, the EUR has fallen below 1.22, and is approaching its lowest levels since mid-January. The ECB statement isn’t expected to contain any policy changes at this meeting (analysts expect the central bank to wait until June or July to announce its plans for the end of QE), but the market will be interested in Draghi’s take on the recent softening in European activity data (bad weather has probably played a part).
In sympathy with the stronger USD, the NZD has fallen to year-to-date lows over the past two days, and currently sits just above 0.7050. The NZD has fallen around 4% since April 17th, making it the worst performing currency in the G10 over that period. A modest pick-up in risk aversion (declines in equities) and some squaring up of NZD long positions have likely contributed to the underperformance in the NZD, in addition to the continued tightening in interest rate differentials (the US 2 year swap rate is now around 45bps higher than in NZ).
The NZD/AUD has also fallen to one month lows, around 0.9335. Australian CPI, released on Tuesday, showed higher than expected core inflation, which contributed to the fall in the cross. Our NAB colleagues didn’t think there was much in the CPI release to change the near-term outlook for monetary policy though; they don’t expect the first hike until November.
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