Near-term risks remain for the single currency

EUR/USD

Today’s CPI Estimate (0.3% vs. Exp. 0.3%) from the Eurozone solidified expectations that the ECB may be content holding off for one more month before embarking on broad-based easing, prompting a minor relief rally in EUR/USD and keeping the pair comfortably above the YTD lows printed on Wednesday at 1.3153. However, near-term risks remain for the single currency as a growing majority of analysts now expect imminent action from the ECB as soon as next Thursday. A minority expect full-blown QE next week, however more analysts are favouring the traditional route of a 10bps cut across all three major rates next Thursday. Conflict among ECB members remains rife, with ECB sources on Friday suggesting that there may be no consensus on a September th announcement, however at least one source has noted that it may be positive for the ECB to surprise the 4 market. This, alongside continued exposure to Russia has prompted unbridled short positions in the EUR, as both JP Morgan and Goldman Sachs slashed their medium-term EUR/USD forecasts today.

Emerging Market FX

After the Ukrainian President Poroshenko cancelled a visit to Turkey in order to focus on the Russian troop activity in Ukraine, emerging market FX fell sharply, particularly in eastern Europe. The RUB saw the sharpest weakness, falling over 3.0% against the USD this week as markets feared the sanctions threat against Russia had reared its ugly head once more. The downside in the RUB has lifted USD/RUB to all-time highs at 37.10. Sharing a border with Ukraine, both the HUF and PLN weakened sharply alongside the reports that a new south-eastern front had appeared in Ukraine, with Russian troops supporting pro-Moscow militias in the tactical town of Novoazovsk. Despite Poland’s central bank governor Belka stating that the Ukraine crisis is no disaster for Poland, the PLN remains on track for one of the worst weeks of the year, as EUR/PLN approaches YTD highs of 4.3104.

NZD/USD

NZD trade has been choppy this week, with early weakness in the pair prompted by a particularly weak trade balance figure, as both imports and exports plummeted further than forecast. As such, New Zealand recorded their first trade deficit since October of last year. The poor trade data sent NZD to the week’s lows of 0.8311. The weakness was, however, short-lived as Fonterra, the world’s largest dairy milk producer unexpectedly kept their milk payout forecast at NZD 6/kg, reaffirming their longer term price outlook despite analyst expectations of a cut. A 75 pip rally in NZD/USD followed over the next two sessions, with the upside only slightly stalling as August’s ANZ Business Confidence fell for a 6th consecutive month to the lowest level since 2012, however the pair remains in close proximity to a firm move above 0.8400 in the short-term.