US dollar under renewed pressure

After hitting a multi month low at the end of last week the USD (index) failed to extend gains this week dropping overnight to 79.592 overnight in the wake of some slippage in US Treasury yields (10 year treasury yields fell to around 2.73%).

Conversely EUR/USD once again breached the 1.39 level despite attempts by European Central Bank officials to convince the markets that the message from last week’s policy meeting was in fact dovish. Markets have yet to be convinced (as do I), however, given that the ECB has yet to put its words into action in terms of further policy easing.

The key to a more sustainable EUR decline / USD recovery is to shake off the bad weather impact on the US economy. This is likely to take place soon although not quickly enough to be revealed in today’s release of US February US retail sales data, which will reveal that core sales remained pressured, leaving the USD without much support.

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RBNZ sends a hawkish message

The RBNZ delivered few surprises by raising policy rates by 25bps to 2.75% overnight. The decision was widely expected but nonetheless managed to give further support to the NZD. The kiwi benefitted from a relatively hawkish statement, with the central bank stating that rate hikes totalling 125bps are likely over the coming months while revising higher its growth and inflation forecasts.

Despite some jawboning to talk the NZD lower RBNZ governor Wheeler noted that opportunities for FX intervention were low. Gains in the NZD look impressive given the headwinds from growth worries in China and lower commodity prices but downside risks remain limited, with NZD/USD set to sustain a move above 0.8500 in the near term. Also positive for NZD is the fact that milk prices continue to remain well supported.

Market angst remains

The same themes continue to worry markets, with Ukraine and China cited on a daily basis as the main causes of market angst. Additionally there is a growing feeling that US equity indices may have topped out given the lack of additional impetus from earnings or economic data.

There is not much on the data front today that will change this dynamic for markets and what there is will be unimpressive, with US retail sales set to have remained soft in February (consensus 0.2%) as bad weather hit spending.

The main market movers overnight have been commodity prices which continue to weaken, with the CRB commodities index falling while the Baltic Dry Index also took a tumble. Gold continues to outshine hitting a high of $1375 per ounce, benefitting from the continued rise in risk aversion while in contrast copper prices dropped to a four year low around $6495 before rebounding slightly.

Impressive Aussie jobs data

Feb employment rose 47.3k in Australia, much bigger than expected (consensus 15k) while the unemployment rate remained at 6%. The components were positive, with full time employment rising by 80.5k and part time employment dropping by 33.3k. The participation rate rose to 64.8% too. AUD rallied following the release of the data and looks set to consolidate gains. However, upside may still be limited given the various headwinds of higher risk aversion and lower commodity prices, with AUD/USD 0.9133 set to act as near term resistance.

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