NZ$/US$ hit hard by ECB President's statement that Euro government bond purchases were not on the cards

By Kymberly Martin

NZD

The NZD/USD plummeted early this morning, as risk appetite crumbled after the ECB meeting. It currently trades around 0.7720.

The RBNZ kept rates at 2.50% yesterday, as expected. It maintained its medium-term tightening bias, though pushed out the implied starting point of its rate hiking cycle to H2 2011 (see fixed interest section). The NZD’s response was very muted. It bobbed above the 0.7800 level yesterday, until the ECB announced its 25bp rate cut early this morning. The market initially responded positively, sending the “risk sensitive” NZD surging higher.

It almost touched 0.7880, before market sentiment was crushed by ECB President Draghi denying that further govt bond purchases were imminent. The NZD/USD then fell rapidly to trade around 0.7720 currently.
A fairly similar, though less extreme pattern of trading was seen in the NZD/EUR. It currently trades just below 0.5800. Similarly, relative to the GBP the NZD spiked to almost 0.5000 early this morning before dropping to 0.4940 currently.

Trading on the NZD/AUD cross was dominated by a spike higher after the slightly weaker-than-expected AU employment data (see below).It surged from 0.7590  to above 0.7610, losing a little ground overnight to currently trade just below 0.7600.

Locally we get electronic card transaction data today. However, the greater driver of the NZD today will be the EU summit and associated headlines. Expect trading to be volatile.

Majors

The USD was broadly stronger over the past 24-hours as risk sentiment was dampened ahead of the EU summit that is currently kicking off. The “risk sensitive” AUD, CAD and NZD were amongst the weakest performers.

The ECB announced a 25bp rate cut, as expected, and expanded the range of collateral it will accept in exchange for loans. ECB President Draghi said the measures were to address bank funding pressures. However, the market responded negatively to his additional comment that further government bond purchases were not imminent. The Euro Stoxx 50 closed down 2.40%, and the S&P 500 is currently down 1.60%. Our risk appetite index (scale 0-100%) fell to 33%.

The USD was relatively stable around 78.40 until the ECB announcement early this morning. On the initial delivery of the 25bp cut the USD fell to 78.10. Soon after, the currency spiked higher after Draghi’s further comments. The USD currently trades around 78.90.

In mirror image, the EUR/USD initially spiked higher on the ECB rate cut, before collapsing from above 1.3450 to 1.3320 this morning.

The GBP showed a similar trading pattern, tossed around by European developments, as opposed to announcement by the BoE to keep rates on hold at 0.50%, as expected. The GBP/USD traded as high as 1.5770 early this morning, before plunging to 1.5620 currently.

The spike and plunge pattern was replicated across “risk sensitive” currencies. The AUD traded up to 1.0380 early this morning before collapsing to 1.0160 currently. Earlier yesterday, the AUD had gapped lower after slightly weaker-than-expected employment data, showing the unemployment rate ticked up from 5.2% to 5.3%.

All eyes will be on the EU summit today. We also get Chinese industrial production, retail sales and fixed asset data today. Tonight the University of Michigan Confidence survey is released.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.