Forex Market Review – EUR/AUD Plummets

Euro weakness and Australian dollar strength has characterised early trading this week – this was felt most strongly in the EUR/AUD cross, which has fallen almost 2 cents over the past two days. The Aussie was given a boost by both Glenn Stevens speech at the Anika Foundation and this morning’s CPI release.

The speech was not used as an opportunity to jawbone the high AUD and Stevens only mentioned the exchange rate twice – in the context of lessons learned from the great depression: “This means not resorting to trade protectionism, or ‘beggar thy neighbour’ exchange rate policies.”. Nevertheless, the currency edged upwards after the speech, before breaking higher today. Australian CPI increased at a 0.5% quarterly, and 3% annual rate – largely in line with expectations, and led by healthcare and alcohol/tobacco increases. The Aussie rallied half a cent on the release, which sits in the upper range of the RBA’s target band of 2-3%.

The Euro broke lower on little news yesterday, before US CPI nudged the currency further to a low of 1.3460. Core US CPI increased only 0.1% from the previous month, down from 0.3% last month and below the 0.2% expected by analysts. For the moment it appears sentiment has soured on the Euro, after markets initially failed to react negatively to the ECB’s announced easing measures. The currency has finally pushed through a major trend-line that began in June 2012. Though Euro weakness has continued, it should be noted that T-LTRO’s are not scheduled to occur until September and December this year.

Still in focus this week will be UK Bank Rate votes released later today and Preliminary GDP on Friday, as well as the cash rate decision from the RBNZ early tomorrow morning. The RBNZ is expected to hike its policy rate by 0.25% this month, after the NZD has trended lower for the last 2 weeks on weak data. The Bank Rate Votes out of the UK are not yet expected to show any dissent from unanimous ‘hold’ votes, however given the recent uptick in inflation and the strong rise in house prices there may be expectations of a change, even if none eventuates – the data will affect positioning ahead of Friday’s UK GDP data. The week is rounded off by the release of PMI figures out of Europe and China – all PMI figures are anticipated by analysts to firm slightly.

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