NZD vulnerable to US NFP surprises; ECB’s Governing Council is now "unanimous in its commitment" to use unconventional policy tools

by Raiko Shareef

NZ Dollar

The NZD continued its steady slide lower, falling by 0.4% against the USD, to 0.8540.

There was no new news relevant to the NZD yesterday.

We suspect the day’s moves reflect ongoing closing of long NZD positions, in a market that got somewhat of a wake-up call with regard to the NZ terms of trade this week.

Some of those investors are also likely to be locking in profits made over the past two weeks, ahead of US non-farm payrolls tonight.

A dearth of data here and in Australia should mean that the local session will be fairly muted.

We suspect the NZD/USD will bounce around between 0.8510 and 0.8560 for the day.

A solid US payrolls report this evening could see additional broad-based USD strength, causing the bottom end of this range to be tested.

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Majors

The USD is stronger against a broad basket of developed and emerging market currencies, helped by dovish noises from the ECB and softer data from the UK.

The ECB policy meeting was the marquee event for the evening, and ECB President Mario Draghi did not disappoint. Significantly, the statement noted that the ECB’s Governing Council is now “unanimous in its commitment” to use unconventional policy tools.

Recall that in previous years, some members (generally the German Bundesbank president) were loud critics of any policy action that resembled quantitative easing (QE). But last week we noted a shift in sentiment, as Bundesbank President Jens Weidmann said he could back QE if a strengthening EUR continued to dampen inflation.

At last month’s ECB meeting, Mr Draghi noted that QE was not even discussed. The reason for this month’s discussion was that the latest euro-zone inflation reading of just +0.5% m/m came as a “genuine surprise” to the ECB. Its officials have long held that headline inflation artificially low due to falling food and energy prices, and those effects will wear off. Today’s statement makes clear that the ECB is ready to step into uncharted waters if inflation continues to disappoint.

The EUR/USD is 0.4% lower this morning at 1.3720. We suspect one reason it has not fallen further is wariness ahead of tonight’s US non-farm payrolls report. A weak number there would see EUR bounce back. But a strong result (or even one in line with the 200k expected) would see a further downward correction for the EUR.

There were few data releases that overnight that could compete with the spotlight cast on the ECB. Certainly, the euro-zone service PMI releases attracted little attention.

Of note was weakness in the UK’s March services PMI, which printed at 57.6 against 58.2 expected. This was the fourth consecutive monthly decline, and helped GBP/USD slide by 0.2% to 1.6590.

Earlier in the day, Australian data were mixed. Retail sales rose by 0.2% m/m following six very strong months, and broadly in line with expectations of +0.3%. On the other hand, the trade surplus came in at $1200m against $800m expected. The AUD has drifted lower against the USD, down by 0.3% at 0.9224.

Today, all eyes are on US employment data due overnight. As mentioned above, non-farm payrolls are expected to grow by 200k after last month’s 175k rise, and the unemployment rate is expected to fall by 0.1% to 6.6%.

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