Changed tone at the ECB as more stimulus signaled before end of year. Markets see gains for commodity currencies, NZD rises

By Raiko Shareef

ECB President Draghi stole the show overnight, all but promising further policy easing at the December meeting. EUR is nursing its bruises, nearly 2% lower for the day.

NZD held onto technically-driven gains through 0.6750, and is the standout performer against the USD.

We did not expect such a shift in policy bias from the ECB at this meeting. In recent (inter-meeting) speaking engagements, ECB speakers sounded satisfied with the current programme. Much of the undershoot relative to inflation target was ascribed to low oil prices, and not worth reacting to.

Today was a sharp turnaround. The ECB is no longer in “watch and see” mode – it is in “work and assess”. As our NAB London colleague Gavin Friend says, it’s as if the ECB has already made up its mind about easing. It just has to figure out which tool (or tools) to use.

The breadth of policy tools discussed today was part of the surprise. An expansion of the existing QE programme (€60b per month until Sep-16) was always the most likely option, either through an extension of the end-date or an increase in the monthly pace. But Draghi also admitted that the ECB is now considering further rate cuts, which would take the deposit rate (currently -0.2%) further into negative territory. The ECB’s previously stated that policy rates had reached their lower bound.

So, why wait? Some Governing Council members apparently hinted they wanted to see further easing today. But in the end, policymakers decided to wait until December, when new forecasts will be released. The ECB can then hang its hat on lower growth and inflation forecasts. Draghi today noted the downside risks mainly stemmed from concerns over growth prospects in emerging markets, and developments in financial and commodity markets (read: a higher EUR and lower oil prices).

What now? Risk assets are clearly relishing the prospect of more stimulus from a major central banks. The Euro Stoxx 50 closed 2.5% higher. But we’d note that, after the Fed baulked at raising rates in September on EM concerns, the sugar hit to risk appetite faded quickly and equities returned to their August lows. Be wary.

NZD sits in an odd place, having gapped up through 0.6750 late in our afternoon in thin liquidity and for no convincing reason. That level now offers some good support heading into the weekend, with 0.6850 the clear cap. Some of NZD’s outperformance comes courtesy of the risk asset pop.

But we also consider it related to support via NZD/AUD, which lifted up through 0.94. CBA became the second Australian major to raise some of its mortgage rates in two weeks, marginally increasing the pressure on the RBA to ease policy as an offset. We still do not believe a cut is likely at the November meeting.

Today, the slew of flash PMI readings are unlikely to garner too much attention, after last night’s fireworks. Note that the Caixin (formerly HSBC) PMI no longer releases a flash reading.

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Raiko Shareef is on the BNZ Research team. All its research is available here.