Demand for high-yielding assets soared during Thursday’s European session after China’s inflation data significantly bettered expectations. February’s Consumer Price Index was predicted to hold at 1.8% on the year, but China’s inflation actually rose to 2.3%. Additionally, most analysts do not expect the jump in inflation to dissuade the People’s Bank of China (PBoC) from additional stimulus measures.
‘Food prices surged before the Spring Festival and a cold wave pushed them higher,’ said Zhao Yang, Chief China economist at Nomura Holdings Inc. in Hong Kong. ‘The jump is temporary. Inflation is unlikely to become a concern that would limit monetary policy.’
Also supportive of demand for the ‘Aussie’ (AUD) during Thursday’s European session was the fact that the US Dollar failed to surge in response to the European Central Bank’s (ECB) aggressive stimulus measures.
The ECB cut all of the rates and expanded asset purchases to €80 billion. The Euro initially slumped in response which caused the US Dollar to gain. Sustained USD appreciation would have weighed on demand for the Australian Dollar, but the Euro quickly surged versus its major peers after President Mario Draghi stated that the central bank is unlikely to cut rates further.
Towards the close of the session, however, the ‘Aussie’ (AUD) cooled versus its major peers as market volatility reduced the appeal of risk-sensitive assets.
During Thursday’s European session, the Australian Dollar to Euro exchange rate was trending in the region of 0.6704 having softened by around -1.30%.
As explained above, the single currency initially dived in response to the announcement that the ECB cut all of its rates and expanded quantitative easing significantly. However, the appreciation was short-lived after the accompanying press conference saw Draghi hint that no further stimulus measures will be used.
Mihir Kapadia, CEO of Sun Global Investments, stated; ‘Today’s bold announcements by the ECB was a far more extensive programme than what was expected, and just shows the immense pressure on Draghi to demonstrate the ECB has got to grips with what is an increasingly worrying economic picture. The stimulus should theoretically boost economic activity, however investors are understandably reluctant about making this presumption given low global growth, global deflationary pressures and poor demand for credit in Europe.’
The Euro may also have found support from rising European bank stocks after the asset purchase expansion. However, the initial stock gains have eased somewhat after Draghi’s statements regarding future policy outlook.
Given the complete absence of domestic data to provoke changes during the Australasian session, the AUD/EUR exchange rate is likely to hold losses. As we enter Friday’s European session, however, there is potential for volatility in response to German inflation data. With that said, today’s ECB action may continue to overshadow domestic ecostats for some time to come.
The Australian Dollar to Euro (AUD/EUR) exchange rate was trending within the range of 0.6673 to 0.6909 during Thursday’s European session.
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