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Dissecting FX Themes

There are three main themes for FX this week. Firstly, monetary policy remains in focus, given that we have the New Zealand central bank meeting to decide policy (rate rise expected), but also in light of the divergence we are seeing between those central banks seen tightening within the next year versus those that still have the potential for easing (principally Japan and the Eurozone).   Secondly, the Ukraine is not far from the headlines given the ongoing tensions and the unease among the G7 nations, especially with regards to energy security. This is playing out not just in the energy market but also in the currency markets, given the reliance of Europe on gas supplied by Russia and channelled through the Ukraine.   At the margins, this is sapping confidence in the Eurozone recovery.

Finally there is the dollar and the US economy.   US data has been coming in above expectations for most of the month and the dollar has so far been slow to react, but has been looking more assured over the past week, especially against the yen which has seen seven consecutive days of gains.   So far though, the mixed messages that have been emanating from the Fed have failed to give the market sufficient confidence that the dollar is on a more assured rising trend, which was expected at the beginning of the year, but was scuppered by the soft patch in data.   For today, data is second tier in the form of existing home sales in the US, together with consumer confidence data for the Eurozone. Note that Australian CPI data is released overnight, with the headline rate of inflation seen rising from 2.7% to 3.2%.   The Aussie remains firm overnight, with a stronger CPI figure giving scope for another push towards the 0.94 level.

Further reading:

Waiting to buy GBPNZD after retracement into support

EUR/USD Testing Area of Interest Ahead of PMI Reports

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