Dollar all over the place as risk appetite turns sour

The dollar has been all over the place today: rising sharply against some currencies and falling hard against others. The European currencies have been the clear winners, while Asian currencies have tanked. In North America, the Canadian dollar has been supported by the rebound in crude oil. With equities also struggling after the major indices gave back big gains yesterday, “risk-off” is written all over the financial markets today.  

Earlier, the EUR/USD finally rose to clear the 1.1300 handle after Mario Draghi, the European Central Bank President, said that the “threat of deflation is gone and reflationary forces are at play" in the Eurozone. This was a clear indication that the ECB may be ready to reduce its monetary stimulus programmes earlier than anticipated. As the EUR/USD went up, down went the inversely-correlated USD/CHF. The GBP/USD gained further ground amid the lack of any significantly dovish remarks from the Bank of England’s Governor Mark Carney, after his economic adviser had hinted at the prospects of voting for an interest rate rise soon. If anything, the latest Financial Stability Report, published today, was broadly positive. The USD/JPY hit new highs on the week and month, with yen continuing to slide after the Bank of Japan’s dovish remarks at its last policy meeting. Other Asian currencies also weakened as the AUD/USD and NZD/USD both relinquished their sharp overnight gains. The other major commodity currency, the Canadian dollar, which has been underpinned by a hawkish Bank of Canada in recent days, found further support as oversold crude prices extended their gains for the fourth consecutive day.

EUR/NZD FX pair to watch

With interest rates being among the highest in developed economies, the New Zealand dollar is considered to be a risk sensitive currencies. So when it is “risk on” it tends to outperform. Well, today is “risk-off” and so it has fallen sharply, especially against the euro. The EUR/NZD has actually formed a major reversal pattern at key 1.5250/60 support area. This level was previously support and resistance, and corresponds with the 200-day moving average. As can be seen, it has turned sharply higher from here, taking out both sides of the recent range. With the last resistance being at 1.5400, this level should be watched for a potential re-test. For as long as this level hols as support, the bias would remain bullish now, unless we see some distinct bearish signs at higher levels first. Consequently, the short-term overhead resistance levels should be viewed – for now – as bullish objectives rather than bearish entry levels.