ECB discusses pre-emptive moves to counter downside risks; GBP will remain vulnerable to renewed ‘Brexit’ fears; cyclical low for NZD/USD seen around 60c

By Kymberly Martin

The USD strengthened against a weak EUR overnight, while the JPY was also back in favour. The AUD and NOK gave back some of their previous day’s gains.

The EUR was on the backfoot overnight as the market toys with the possibility of further ECB easing as soon as its 10 March meeting.

The ECB’s Minutes overnight were not particularly revealing in this regard. However, there was some discussion as to whether the Bank should react pre-emptively to downside risks rather than waiting for them to fully materialise. The EUR/USD has traded down from 1.1150 to 1.1110 currently.

The GBP/USD bucked the downtrend in the EUR, gapping higher around midnight. It has subsequently consolidated above 1.4320. Over coming months we believe that the GBP will remain vulnerable to renewed ‘Brexit’ fears in the run-up to the British referendum on EU membership.

The AUD/USD gapped sharply lower yesterday afternoon, following the release of the AU employment report. Employment was weaker than expected, at -7.9k and the unemployment rate rose to 6.0%, from 5.8%. However, putting aside sampling issues, our NAB colleagues believe it is clear the AU labour market has improved in trend terms. The softer print should be seen as employment returning to a more realistic pace after spectacular growth last year.

Nevertheless, yesterday’s softer outcome will mean the RBA will be watching future employment prints closely to determine “whether the recent improvement in labour conditions was [is] continuing”.

Our NAB colleagues suggest positive employment growth in excess of 14k per month (which is needed to keep the unemployment rate from rising) should alleviate any renewed pressure on the RBA to ease. NAB sees the RBA on hold in 2016. The market prices around 35bps of cuts within the year ahead. The AUD/USD trades around 0.7150 this morning.

The NZD/USD made some gains yesterday afternoon but failed to hold onto them overnight. It found resistance at the 200-day moving average, near 0.6670, before slipping back to trade at 0.6630 currently.

Over the medium-term we continue to believe the NZD/USD will make a cyclical low in the vicinity of 0.6000. Near-term support would likely be encountered on any pullback toward 0.6500.

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Daily exchange rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.