Currency Update

Last week may have seen the high water mark in the Euro as it hit a high over 1.60 against the USD on the back of hawkish comments from the ECB, indicating that they thought the markets view of rate cuts was misplaced, as neither the general state of the economy, nor the high rate of inflation, justified cuts. Later in the week European officials reacted to the record level of the Euro, a result of their own comments, and tried to talk the currency down, a tactic that had only limited success until it was backed up by some weaker economic data, with the weak German IFO release bringing the currency down. This weak data has caused a sea change in the prospects for the Euro, in spite of the ECB’s rhetoric , and coupled with a change of sentiment for the expectations of Fed rate cuts, the high tide mark for the EUR/USD rate could be left at 1.60 for some time.

The change of sentiment for the Dollar has come about due to a shift in expectations of how far the Fed will cut US rates. The markets had previously expected cuts done to below 1.5%, but a batch of slightly less negative than expected data, has switched expectations to a further rate cut to 2% this Wednesday and then a pause, with the possibility this cut may be the last. Sterling has kept buoyant against the Dollar in spite of this, as Friday’s GDP figures came in at 2.5% yoy, reasonable growth for a developed economy and enough to confirm the markets view that BoE may cut rates again, but not by much further. Sterling has stayed supported around 1.98 against the US Dollar, and over the weekend has held around 1.2650 against the Euro, after taking advantage of the single currencies’ weakness at the end of last week.

The Aussie Dollar is another currency which hit a record high against the US Dollar last week (a 24 year high at 0.9541), before the change of sentiment in the US Dollar has brought the rate down. Australian trader’s returned from their day off for Anzac day, a day of remembrance and not a day of celebration as incorrectly implied in Friday’s note, to find the rate 2c down from it’s high, although it has recovered in today’s trading. The Pound has climbed back above 2.11 against the Aussie Dollar after falling to a low under 2.10 last week.

It’s a quiet start to what could be a significant week. Today we have German consumer confidence, and a range of speakers from the ECB, who are likely to soften their hawkish rhetoric, although this is unlikely to signal any immediate change in the ECB’s strategy.
Later in the week we have further indications of inflation from both the Eurozone and the US, as well as a rate decision from the Fed, and on Friday the non-farm payrolls figure, to cap the week off.

Michael Corcoran – Assistant Manager |Treasury Solutions | nabCapital | A division of National Australia Bank Limited