EUR/USD is up a touch from last night's close but little changed from early London hours. The market is clearly reluctant to build short USD positions vs the EUR. Higher US yields (though these have moved away from yesterday's highs), concerns over the outlook for growth in the Eurozone and the health of the German banking sector are all factors limiting upside potential in EUR/USD for now. Instead short USD positions are being extended in 'risky' trades. The NZD has surged following the RNBZ's decision overnight to leave interest rates on hold, the AUD is pushing significantly higher vs the USD, EUR and the JPY and cable is following in its wake. EUR/JPY has seen no clear direction allowing USD/JPY to mirror EUR/USD.
Despite talk that the RBNZ could cut rates by another 25 bps
this morning, rates were left on hold. The surge in the NZD that has
followed suggests that the market largely ignored what was an
essentially dovish report from the RBNZ. The economic outlook was
described as weak and there was a frank warning that rates may yet move
lower. The recent rise of the NZD was described as unhelpful and
coincident with downward pressure on inflation. The concerns on the NZD
should not be ignored since the RBNZ did intervene in the market as
recently as June 2007 in order to cap the NZD, so the risk of another
similar move cannot be totally dismissed.
This risk should
offer decent support to AUD/NZD which corrected sharply lower
overnight.
Sterling's better tone vs both the USD and the EUR follows
the settling down of UK political jitters (for now) and a rise in
optimism that the economy has already troughed, though there was no new
data this morning to support this week.
EUR/GBP has made
new lows for the year, though it remains about 25% higher than levels
maintained ahead of the Northern Rock crisis suggesting that
medium-term downside potential remains.
USD/CAD has moved lower this morning consistent with the stronger tone of the commodity currencies and higher oil prices. However, the market continues to be wary of pushing USD/CAD below the 1.10 level.
This afternoon the market may further dissect the implications of IMF bond issuance and the potential USD negative implications – though in essence this is not new news. US May retail sales will be key, initial claims are also due.
