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USD under pressure as "risk on" mentality prevails

Written by Sam Coxhead on February 2nd, 2011.      0 comments

8:35 AM (NZT) Offshore markets have shown a massive appetite for risk overnight. This appetite for risk has seen the USD under considerable pressure.
Three issues have paved the way for this rapid move.
Firstly there has been a host of better economic data released across the UK, Europe and the US. This stronger manufacturing data from all three economies has led the stock markets higher. Given that it is the start of the month when a flood of new funds are released for investment, this has helped fuel the rally in stocks. In 13 of the last 15 months, the first trading day has been an up day for equities.
Secondly, there has been growing acceptance over the last couple of weeks that the European Debt situation is calming down. Plans by the Euro-zone members to give the European Financial Stability Facility (EFSF) more flexibility and powers to deal with distressed member bond markets seems to be the key. With the responsibility being switched from the ECB to the EFSF, the ECB is left with its core job of maintaining price stability. With this in mind the ECB is likely to embark on a tightening of monetary conditions with a lift in the cash rate around midyear. As a sign of lessening fears about EURO debt, the spread between the benchmark German debt and that of peripheral states has been steadily declining  over the last week or so, and contracted sharply again today. Foreign Central support for the debt, and therefore the Euro has led this change. This appears to part of the long term move away from USD denominated assets.
Thirdly, the market is discounting, or at least putting to the side, concerns about the political instability in the Middle East , and the possibility of a spread in chaos to Jordan and Syria.
In summary, we have equity markets on post Lehman Brothers collapse highs, commodity markets well bid, longer end rates moving higher around the globe, and the USD under pressure.
Whilst sharp moves like this do not completely stack up, the momentum of them does require respect. With various technical resistance points brushed aside, the next couple of days will prove to be interesting at the very least. Expect gains from the NZD to be more hard fought from here ahead of the important employment numbers on Thursday. Fridays employment report in the US is shaping up to be a pivotal piece of data in the global context.
    Last 24 hours trade
  Current level Low High
NZD/USD 0.7798 0.7711 0.7817
AUD/USD 1.0120 0.9964 1.0152
NZD/AUD 0.7705 0.7696 0.7748
AUD/NZD 1.2978 1.2906 1.2993
NZD/GBP 0.4831 0.4808 0.4841
NZD/EUR 0.5643 0.5632 0.5656
NZD/JPY 63.47 63.18 63.62
NZD/CAD 0.7738 0.7708 0.7761