ECB policy meeting disappoints as Draghi pours cold water on idea of near-term stimulus for eurozone

by Mike Jones

NZD

The NZD/USD climbed to 3-week highs around 0.7700 overnight as stimulus hopes bolstered investors’ appetite for risk.

With the exception of the AUD, the NZD strengthened against all of the major currencies.

Crikey. Jaws dropped and eyes popped following yesterday’s cracker of an Australian GDP report. What a beauty. The 1.3% quarterly gain was more than double the consensus forecast of 0.6%. Yes, the data is backward looking, and there has been some murky water go under the bridge since the end of Q1.

But annual growth of 4.3% certainly warrants attention in a market that was looking for an additional 130bps worth of RBA easing. As this was pared back (to around 100bps) in the wake of the GDP report, the AUD/USD was launched above 0.9850. The NZD/USD was eventually pulled up through resistance at 0.7650 on the AUD’s coat-tails.

A mix of corporate demand and speculative short covering added impetus to the rally in AUD and NZD.

Overnight, a more positive global backdrop kept the NZD/USD on an upward trajectory. A wave of more positive sentiment washed through markets on hopes a bailout plan for Spanish banks may be just around the corner (see Majors).

Equities and commodity prices pushed higher and our risk appetite index (scale 0-100%) bounced back to 40%, after starting the week closer to 30%. Investors trimmed ‘safe-haven’ positions in the JPY and USD, propelling NZD/JPY from 59.80 to around 60.80. NZD/USD flirted with the 0.7700 level for the first time in three weeks.

Looking ahead, the Aussie data fest continues today with employment data for May. Zero jobs growth and a tick-up in the unemployment rate from 4.9% to 5.1% are expected. The market is probably still a little short AUD, so a positive surprise would prompt the biggest reaction.

Tonight is all about Fed speak. Chairman Bernanke’s testimony before Congress will be most closely watched. Following Friday’s weak US jobs report, investors are looking out for hints the Fed is now considering additional quantitative easing (QEIII).

Any such hints would undermine US bond yields and the USD, further underpinning the NZD/USD.

Having finally broken through the 0.7650 resistance level, the next layer of NZD/USD selling should kick in around 0.7760. Initial support is expected on any dips to 0.7615.

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Majors

There’s been a more forceful move back into risk over the past 24 hours as speculation of European policy action has gathered pace. Equities and commodity prices have surged. Led by the AUD, the major currencies have notched up gains of 0.5-1.5% against the retreating JPY and USD.

The feel-good vibe began with yesterday’s rollicking Australia GDP figures. Asian stocks revelled in the improved economic news. Later on, chatter that European policy makers are putting together a bailout programme for Spain’s banking sector allowed the positive mood to continue.

European stocks soared 2.1-2.5%, the S&P is up around 1.8% and the CRB commodity price index has lifted 1.2%. Against this backdrop, investors pared short positions in risk sensitive currencies like the AUD, NZD and CAD.

‘Safe-haven’ currencies were shunned. The AUD/USD climbed to a 2-week high above 0.9900, helping drag the EUR/USD back over 1.2550.

It’s worth noting, Spain has thus far refused to formally request aid for its banks. The Prime Minister has admitted help is needed, but does not want the stigma or conditions likely attached to borrowing from the EFSF.

To be fair, the Spanish government has been doing all the right things in terms of structural reforms. It’s the banks that are the problem. However, last night’s reports suggest Germany is looking at funnelling bailout cash directly to Spanish banks, and imposing only ‘limited conditionality’ on the sovereign.

This could make Spain a little less reluctant to accept aid. In any event, it seems we’re again stuck in the familiar pattern of markets selling off until the Europeans apply another crisis ‘band-aid’, which then spurs a sharp but ultimately temporary relief rally.  This repeating pattern keeps currencies whippy and makes it hard to identify trends.

Last night’s ECB policy meeting was greeted with general disappointment. Rates were left at 1% and ECB chief Draghi poured cold water on the idea near-term stimulus (LTROs and/or rate cuts) was in the offing. Investors’ annoyance was reflected in a near ½ sell-off in the EUR/USD (to an overnight low of 1.2450). These losses were more than recouped later in the night.

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