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NZD ignored; market attention all on the euro. Even strong US services sector data gets little notice

Currencies
NZD ignored; market attention all on the euro. Even strong US services sector data gets little notice

By Raiko Shareef

NZ Dollar

The NZD is off marginally overnight, with market attention firmly elsewhere.

NZD/USD is 0.2% weaker at 0.8310.

NZD has traded in a fairly tight range, capped by 0.8350 on the topside, which should continue to provide initial resistance.

Unless tonight’s US employment reports are significantly better than expected, the support at 0.8260 should hold into the week’s end.

Overnight, all the attention was on Europe, where the ECB pulled out (nearly) all the stops in its policy meeting.

The collapse in EUR saw the NZD/EUR cross up 1.3% to 0.6420, taking it above the 50-day moving average for the first time since late July.

We do not expect this move to extend through 0.65, with our year-end forecast at 0.62.

That said, the risks to this view are to the upside, should the ECB’s latest actions prove insufficient, and they are forced to talk up the prospect of sovereign bond buying.

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Majors

The EUR is sharply weaker overnight, as the ECB announced a swathe of easing measures, over and above market expectations. EUR/USD is down by 1.6% at 1.2940, having broken two big figures on the way down. This would rank amongst the biggest single-day moves amongst major currencies in 2014.

First, the ECB cut its policy rates by 10bps, taking its deposit rate from -0.10% to -0.20%. This was not a consensus expectation, with only a handful of analysts picking it to occur (and we tip our hats to our London-based NAB colleagues for being amongst them). Second, ECB President Draghi revealed that the much-anticipated Asset Purchase Scheme would commence in October, surprising the market, which only expected to be given further clarity on the program. Third, the ECB announced a third round of the Covered Bond Purchase Program. Recall that the previously-announced Targeted Long-Term Refinancing Operation (TLTRO) is set to begin in October, too.

The ECB gave no indication of the intended size of the individual programs announced today, but in all, Draghi expects to see the ECB’s balance sheet return to its size in 2012. This implies about €1.1 trillion worth of asset purchases from here, or a 50% increase.

What’s more, the ECB now considers itself to be at the lower bound in terms of its policy rates, signalling that further technical adjustments lower were “no longer possible”.  This has the effect of stimulating banks’ uptake of the TLTRO, which is referenced off the policy rates.

Of course, these moves fall short of full-blow sovereign bond buying, partly because there is still considerable reluctance on the part of national central banks (chiefly Germany). But the option remains very much on the table, should the measures announced to date turn out to be insufficient to stave off deflation.

Earlier this week, we (along with our NAB colleagues) revised down our EUR/USD targets, having reached them sooner than anticipated. The move in EUR overnight has already taken out our end-Sept target of 1.30, and puts us comfortably on track to hit our 1.28 target for year-end. If anything, this may prove too conservative.

Understandably, market commentators this morning want to talk of little else apart from the ECB. But we would point out continued promising signs out of the US. Both US services PMIs (Markit and ISM) comfortably improved on already-high expectations. The latter lifted to its strongest pace since August 2005.

Last night also saw Loretta Mester’s first speech since she took the helm of the Cleveland Fed. She is a voter on the FOMC this year. Her comments were fairly balanced, but included the fact that she expects the unemployment rate to fall to neutral (5.5% percent by her estimate) by end-2015. This suggests she will not stand in the way of a less dovish Fed statement in upcoming meetings.

Yesterday, Australia’s retail sales data for July came in exactly as the market had expected (+0.4% m/m). But the trade balance was significantly less negative than anticipated, with positive revisions to last month’s figures, too. This adds to the recent run of AUD-positive news, include RBA Gov Stevens’ speech on Wednesday. Little surprise then than AUD is near the top of the G10 leaderboard overnight, unchanged against the USD at 0.8300.

Tonight, all eyes on the monthly US employment reports. The USD rally to date looks fairly robust, and it would take a rather catastrophic number to significantly derail it. Markets are expecting headline non-farm payrolls growth of +230k, and the unemployment rate to edge lower to 6.1%. Note also there are no fewer than four Fed speakers tonight (Fisher, Kocherlakota, Rosengren, Plosser), though the market will be inclined to ignore them ahead of the 17-18 Sept FOMC meeting.

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