Greenback Holds Steady; Kiwi Hits the Skids on RBNZ

In keeping with the recent theme, the greenback reacted positively to outperforming U.S data with a solid retail sales print providing a notable bounce across the board. U.S Retail Sales jumped 1.1 percent in February, outpacing expectations of 0.5 percent growth.

U.S dollar strength after top tier data out-performance suggests markets continue to looking the data pulse in the context of Fed stimulus expectations. In short, the stronger the economy, the greater the chance of the Federal Reserve scaling back asset purchases sooner than anticipated. This theme was particularly noticeable in the ensuing period of Friday non-farm payrolls which saw the greenback forge gains across the board.

As noted in Monday's Currency Focus:

On the assumption the U.S dollar retains its ability to rally in times of market turmoil and strengthen on outperforming (top-tier) data, we see conditions broadly in its favour. There is however a case to suggest markets may have suitably priced-in chances of an early than expected scaling back of asset purchases, which will no doubt be tested in the week ahead with a few key releases on the docket. In turn, it would be wise to expect more moderate appreciation from the greenback should data continue to point to stronger economic conditions, especially in light of the uncertainty surrounding the sequestration.

The Euro took two pronounced steps lower over the sessions with price action falling to 3-month lows of 1.2922 before consolidating slightly higher in the later part of U.S trade. Once again the theme of negative contagion has taken hold in the Euro-region, and investors remain hesitant to bid the Euro higher in any sort of size. True to form, markets are looking to the European Central Bank for solace, and expectations the bank will take further steps to ease policy should continue to keep the Euro on the back foot.

Italian debt yields rose overnight following a debt auction which was met with weaker than expected demand while a mix of dollar strength and rates-driven weakness forced the Euro deep into the 1.29 handle.

Kiwi

The Kiwi hit the skids this morning after the RBNZ policy decision. While keeping rates on hold at 2.5 percent, the NZD carved out 2 ½ month lows following the statement which flag the implications to growth in the region from the high exchange rate and drought conditions in north. Although we believe the banks tightening bias will remain, its apparent growth headwinds may see any increase in the cash rate pushed further into the future and markets are responding accordingly.

Australian dollar

The RBNZ decision appears to have provided residual weakness for the Aussie dollar, which has retreated back below 103-figure after the decision.  Overall, we've seen the local unit trade in a reasonably tight range with a downside bias; however traders will now look to jobs data to define the next move. The Australian labour force is expected to have grown by 10,000 in February with the official unemployment rate likely to have edged higher from 5.4 to 5.5 percent.

At the time of writing the Australian dollar is buying 102.9 US cents.