After the initial resilience seen on the day of the policy moves last week, the euro has been weakening over the subsequent trading sessions, down from 1.3660 at the start of the week to 1.3540 currently and weaker vs. all the other major currencies. But the bigger issue for the currency is the performance of underlying asset markets, both bonds and equities which were largely responsible for the resilience of the single currency in recent months. Governments such as Portugal, Cyprus and others are taking advantage of these low yields to push ahead with issuance, with Portugal undertaking their first public bond issuance since they exited their bail-out program earlier in the year. Much has been made of the rally in peripheral bond yields recently, which has put the Italian 10 year within in a cat’s whisker of yielding the same as the equivalent UK bond, something not seen since the early part of 2010. Even a modest reversal of these peripheral valuations threatens the stability of the single currency, with overseas investors far less inclined to invest than was the case even six months ago.
For today, the main focus initially is on the labour market data in the UK. The significance of this for sterling has reduced since the Bank softened it as an intermediate target for their monetary policy framework. The headline rate is seen moving down to 6.7%, with the claimant count (a narrower measure of unemployment) seen falling by 25k. Better data (principally via lower than expected rate) should provide some marginal support for sterling, which is pushing 18 month highs vs. the single currency. The other main focus is with the kiwi, with the RBNZ expected to push rates up another 0.25bp to 3.25% at their meeting this evening. The currency has largely priced this in, with the bigger issue being the statement and whether the central bank moves towards a more neutral tone. The kiwi has been performing strongly over the past week, so has largely priced in such an outcome. AUDNZD is still the interesting cross to watch; with the recent kiwi gains (vs. the USD) having been sterilised by Aussie strength and a sustained break above the 1.10 level has so far proved lacking.