GO Markets FX Analysis | Euro extends rally; A$ holds 104

Euro extends rally; greenback mixed

The Euro continued its run of milestone highs overnight forging 32-month highs against the Yen and 14-month highs against the greenback. We saw a similar pattern across the board with commodity units the Aussie and Kiwi succumbing to the seemingly unstoppable Euro.

It would seem a desire to unwind the great ‘Euro break-up’ trade has superseded the U.S dollars credentials as a safe-haven play, with the Euro using the less than encouraging GDP releases as an inflection to move higher. Support for the Euro appears to have reached critical mass, with an exodus of short positions encouraging new money along the way. Still, it would be wise to expect a natural period of consolidation to kick in along the way and selling activity has been noted around the 1.3580 levels and one would expect fresh ‘good news’ maybe needed before we see a sustained break above these levels. At the time of writing the Euro is buying $US1.3560

The greenbacks performance was largely inconsistent notching up losses against the Swissie and euro and sterling, while extending gains against its commodity counterparts the Aussie, Kiwi and to a smaller degree the CAD. Perhaps the best barometer of sentiment overnight came from the USDCHF pair, with the greenback slumping to 1-month lows against the franc, reflecting a bid for safety surrounding the US GDP release.

U.S growth slumps in 4Q; FOMC review

Predictions of less than inspiring U.S growth in the fourth-quarter may have been largely priced in, however few predicted the extended drop seen in the latest growth estimates. The U.S economy contracted 0.1 percent in the fourth-quarter, a significant drop from 3.1 percent growth in the third. In annual terms the economy grew a meager 0.6 percent from a previous 2.7 percent. Economists had widely anticipated growth of around 1.1 percent, or 1.5 percent in annual terms. The larger than expected drop has been largely attributed to 22-percent cut in defense spending.

In another news, a gauge of private sector employment by ADP showed 192,000 new positions in January – a particularly good pre-cursor to the main event of Friday with the official government statistics on the docket.

Meanwhile, the latest FOMC communication extended little in the way of new insight into Fed policy. While maintaining the explicit targets relating to inflation and unemployment, the statement used all the usual adjectives to describe economic conditions, with employment continuing to expand at a ‘moderate’ pace. As widely expected, the statement didn’t elaborate further on December’s meeting which reversal “several” members expressed concerns over the level of stimulus in the economy and advocated a need to begin the unwind process this year. The statement attributed a pause in economic activity – in part – to weather conditions and as anticipated made no change to their asset purchase program valued at $US85 billion per month.  Kansas City Fed President Esther George was a lone dissenter, highlighting the inflation risk and potential financial imbalances of the Fed’s stimulus offensive.

Aussie dollar holds 104…just

There was little to attract bids to the Aussie dollar overnight with a bid for safety forcing commodity bloc currencies moderately lower. The local unit remained under pressure following the release of U.S GDP, briefly breaking the 104 US cent mark by a whisker. Still the Aussie’s performance was far from exciting with a reasonably narrow 35 pip range seen throughout the session.

Economic data on the local docket today includes new homes sales, private sector credit, and import/export trade index. Although not typically high risk events, the Aussies precariously hanging on to the 104 US cent mark, so it wouldn’t be a bold call to suggest a move below in the domestic session alongside regional equity markets.

Across the Tasman, the Kiwi has pared overnight losses following the RBNZ policy decision this morning which saw the bank hold rates steady at 2.5 percent while maintaining a hawkish bias.

At the time of writing the Aussie dollar is buying 104.1 US cents, the Kiwi is trading at 83.6 US cents.


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