Lower oil prices and softer equity markets drive currencies. Draghi comments drive volatility. AU jobs data means rate cut chances recede

By Kymberly Martin

Over the past 24-hours the AUD has been the strongest performer, whilst the NZD has been amongst the weakest.

The USD had traded a fairly volatile path back to where it was yesterday morning.

A further decline in the WTI oil price and softer equity markets were a feature overnight. The Euro Stoxx50 closed down 1.8% and the S&P500 is currently down about 1%, led by commodity sectors. Our risk appetite index has dipped to 49%, from 59% at the end of last week. The oil-linked NOK has been the worst performing currency over the past 24-hours, losing 0.8% versus USD.

The USD index has traded a volatile path over the past 24-hours, seemingly instigated by central bank rhetoric. First, it was boosted late last evening, after ECB’s Draghi confirmed the ECB would “re-examine the degree of monetary policy accommodation” at its Dec meeting. He also said economic risks are “clearly visible” and that inflation dynamics have “somewhat weakened”. This appears a green light to further easing to be announced at that meeting. The EUR/USD hit intra-night lows below 1.0700 soon after the comments.

However, the EUR soon made a comeback. It was tossed around with USD volatility in the early hours of this morning that appeared to relate to a swathe of headlines from Fed speakers. The Fed’s Bullard, Lacker, Yellen, Evans and Dudley were all vying for column inches. The usual broad range of views was expressed and plenty of hints of potential for a Dec hike were made. However, given the market is now pricing almost a 70% chance of this eventuality, it did not seem to quite get the firm confirmations it required. The USD index has fallen from intra-night highs above 99.20 to trade below 98.70 currently.

The AUD has been the star performer over the past 24-hours. It gapped higher after a stronger-than-expected AU employment report, yesterday afternoon. The RBA will welcome these figures. The data provides further support for our NAB colleagues’ view that strengthening in the non-mining sectors of the economy is more than offsetting the drag from weakness in mining.

NAB remains of the view that the RBA will not cut rates further, but rather keep its cash rates at 2% for an extended period. The AUD/USD gapped form 0.7060 to above 0.7140, before drifting down to below 0.7120 overnight.

The NZD/AUD plummeted as a consequence. From close to 0.9300, the NZD/AUD now trades below 0.9180. Its sharp fall since the start of Nov, helped by the market reassessing its view of further RBA rate cuts, has taken the cross back within its fundamental ‘fair value’ range. We currently calculate this to be 0.9000-0.9300.

The NZD/USD has also drifted a little lower, but found support at 0.6500 in the early hours of this morning. It trades around 0.6530 currently.

Tonight, the USD may take its cue from the release of US advance retail sales data, whilst the University of Michigan consumer sentiment index is also due.


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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.