Market Drivers April 30, 2015

RBNZ keeps rates on hold, AUD dives on rumors of cut
EUR soars on end of month flows
Nikkei -2.69% Europe -0.28%
Oil $59/bbl
Gold $1204/oz.

Europe and Asia:
AUD Private Sector Credit 0.5% vs. 0.5%
EUR German Unemployment -8K vs. -14K eyed
EUR Flash CPI 0.0% vs. 0.0%

North America:
CAD GDP 08:30
USD Personal Income/Spending 08:30
USD Chicago PMI 09:45

It was an insanely volatile night in FX with EUR/USD tracing out nearly a 200 point move as a combination of end of month flow and a massive short squeeze pushed the pair to within a few pips of the 1.1250 level before retreating back below 1.1175.

The huge move in the EUR/USD which is up nearly four big figures this week has caught many market participants by surprise. The move has been fueled by a massive realignment in the dollar trade as consensus view about the Fed is starting to change quickly. Yesterday’s FOMC statement reaffirmed the fact that US economy has clearly slowed in Q1 and rather than look through that weakness the Fed will now wait for confirmation of pick up before committing to normalization.

For the market that means that the rate hike in June is out of the question and one in September is now in doubt. Therefore all of the longer term traders who positioned themselves for an unambiguous dollar rally now find themselves well underwater and are reversing many of those trades creating massive squeezes in EUR/USD. All this despite the fact that data from the EZ continues to disappoint with German Unemployment, French Consumer Spending and Flash CPI all missing their mark as evidence of pick in activity remains scant.

For the time being the negative fundamentals mean little to the strength of the EUR/USD as short covering continues to take place. However with the pair now well above its 1.05-1.10 range the action of the past 48 hours may have spent its fury and the pair could consolidate for around these levels for now.

Volatility was not contained to euro only. The Aussie came under heavy pressure in Asian and morning European dealing first on lower iron ore prices but then on a report in Sydney Morning Herald that the RBA may cut rates at the May meeting. This seems doubtful to us as the RBA has consistently stated that it will remain neutral for now. Although commodity export prices continue to decline, other sectors of the economy remain relatively robust and the RBA may be loathe to fuel another leg in the country’s housing bubble by lowering the cost of borrowing even further. Still with Fed seeming to shy away from normalization for now, Australian monetary authorities may be forced to act to keep the exchange rate below the 8000 mark and keep the carry trade speculators at bay.

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