EUROPEAN FX UPDATE: Kiwi gives up post-RBNZ gains while Aussie extends on RBA-induced losses and Yen ticks higher as sentiment remains cautious

Analysis details (09:45)

DXY

The index continues to trade on either side of the 101.50 mark following similar overnight price action. Markets are eyeing the next catalyst, which, in the absence of macro news flow, is likely to be the US ISM Services PMI. The release could reprice Fed rate expectations, at least in the short term, following yesterday's US JOLTS data, which dragged the DXY lower to a 101.45 trough yesterday. The ISM release may take precedence over the ADP, as the latter historically has not been a reliable indicator of payrolls, which will be released on Good Friday. However, it could still attract attention after yesterday's JOLTS. Analysts at ING suggest that the combination of the decline in job openings and the drop in ISM services could mean that prints in the 52-53 area could have a similar effect, as markets see more than one high-frequency piece of data moving in the direction of economic slowdown. "With that in mind, we think the balance of risks is skewed to the downside for the dollar today," the desk says. From a technical standpoint, the DXY printed an intraday low of 101.43 so far, slightly under yesterday's trough, with clear air seen until 101.80-81, the lows from February 1st and 2nd.

NZD, AUD

The Kiwi has trimmed the gains seen after the RBNZ's 50bps hike surprise (vs exp. 25bps hike) to 5.25%, which saw NZD/USD soar some 70 pips from 0.6306 to 0.6376. The RBNZ meeting did not include forecasts or a press conference by RBNZ Governor Orr, but the minutes indicated slowing demand and moderation in core inflation are expected. That being said, the pair has almost fully retraced its overnight gains while risk in Europe is sullied. Some also suggested the NZD/USD is capped by the RBNZ's previously revealed terminal target at 5.50% - which has led some to conclude they are near the end of the tightening cycle. Meanwhile, the Aussie experiences a hit from the RBA/RBNZ divergence (alongside the pullback in base metals) and sits as the G10 laggard once again. AUD/NZD slumped from 1.0700 towards 1.0600 after the RBNZ’s surprise, before the cross faltered under 1.0600 during European trade. The AUD fell from 0.6779, and under its 200 DMA (0.6748) before testing 0.6700 to the downside, with the next downside levels being the 21 DMA (0.6673) and the 3rd April low at 0.6650. 

EUR, GBP

EUR/USD held onto yesterday’s gains in a calm Asian session, and trades relatively flat in early European hours on either side of 1.0950 in a 1.0945-64 range, and within yesterday’s 1.0881-0973 parameter. Eurozone Final PMIs were largely revised lower for March, but underscored that recession was likely avoided, although “The case for further interest rate increases also remains strong based off the survey’s price gauges. Although inflation rates have cooled from their peaks, they continue to run in hot territory, particularly across the service sector.” The calendar for the EZ for the rest of day now consists of ECB Vasle (10:15BST) and Chief Economist Lane (15:00BST), but “The risks of surprise remarks by ECB officials appear to have moderated lately as most key speakers have recently aligned (in line with their position in the dovish/hawkish spectrum) with a pledge to keep raising rates”, according to ING, whilst the desk at IFR suggests EUR/USD is supported by diverging ECB and Fed expectations and buying dips is favoured as long as daily closes remain above the 10 DMA (1.0865). Elsewhere, French President Macron and European Commission President von der Leyen will be meeting Chinese President Xi, although sources cited by SGH Marco suggested China does not expect von der Leyen's trip to improve relations between China and the EU, nor be conducive to an early truce between Russia and Ukraine (full Newsquawk preview available in the Research Suite). Sterling is somewhat despondent following the rally seen yesterday, while the PMIs for March were revised higher and suggested: "March data confirmed that the UK service sector returned to growth during the first quarter of 2023”. GBP/USD has waned from a 1.2514 high, under the psychological level and trades around 1.2475 at the time of writing, while yesterday’s range was printed at 1.2393-2525. Ahead, BoE’s dove Tenreyro is slated to speak, while she stuck to her dovish script yesterday.

JPY

The JPY is currently the second-best performing G10 currency - likely due to the cautious market sentiment as the European session got underway. USD/JPY rebounded in Asia, with some sources citing demand seen for the Gotobi Tokyo fix, while others also highlighted that market volumes are lighter due to holidays in China and Hong Kong ahead of the Easter holidays in the West. From a technical standpoint, USD/JPY fell from an Asia-Pacific high of 131.84 to its current European low of 131.31. The next level to the downside is the psychological 131.00 mark, followed by the March 29th low of 130.75.

05 Apr 2023 - 09:50- Research Sheet- Source: Newsquawk