Currency Exchange Update: Euro Boost After BOE Comments

The rise in risk appetite continues unabated improving the outlook for the high yielding risk based currencies like the Australian dollar, New Zealand dollar and South African Rand and diminishing demand for the safe haven currencies like the US dollar and Japanese Yen.

The dollar has now dropped to its lowest level against the euro since last September.

Yesterday saw the euro receive a further boost after upbeat comments from European Central Bank President Mario Draghi at the monthly policy meeting. Draghi said that policy makers had unanimously agreed that there was currently no indication for an interest rate reduction and have adopted a ‘wait and see’ approach for the time being but foresee an improvement in the economic outlook for the euro zone in the second half of this year.

Draghi said "Risks around the economic outlook in the euro area remain on the downside" but expressed optimism for the future, pointing out that the euro zone's economic recovery should begin at the end of the year pointing to several indications of improvement, such as lower sovereign debt yields, low volatility and a reduction in the central bank's balance sheet.

In the UK, the Bank of England as widely predicted kept UK interest rates and their Quantitative Easing (QE) budget unchanged.

In Japan, new prime minister Shinzo Abe unveiled a Y10.3 trillion economic stimulus package that the government expects will lift the country’s gross domestic product by 2% and create 600,000 jobs. Abe said “We are making a bold shift . . . towards an economic policy that will create wealth through economic growth”. Analysts pointed out that the stimulus package will exacerbate Japan’s deteriorating fiscal health as government debt is already at 220% of GDP. The newly-elected Mr Abe, however, is under significant pressure to lift the economy out of its fifth recession in fifteen years before Upper House elections in July.

Strong data from China is largely behind the improvement in world stock and commodity markets and last night, data showed that Chinese inflation accelerated in December as a bout of cold weather led to a spike in vegetable prices with consumer prices posting their biggest increase in seven months, rising 2.5% in December from a year earlier. November’s data showed a 2% increase. The data from the statistics bureau showed that the main contributor to inflation was the cost of food which accounts for nearly two-thirds of the month-on-month increase. Large swaths of China have experienced their coldest winter in three decades, raising energy prices as well as the production and distribution costs of agricultural products.