Eurozone CPI falls to fresh lows; EUR suffering spill-over effect from GBP weakness and expectations of additional ECB stimulus; expectations of further rate cuts by RBNZ fuelled by weaker data

By Jason Wong

The NZD and EUR are at the bottom of the leaderboard for the day, following weak data releases, while the Yen is strong despite a modest risk-on tone.

Weak NZ business confidence and inflation expectations data drove the NZD down from 0.6640 to 0.6570 by early afternoon, with the data helping fuel expectations of further rate cuts by the RBNZ.

This was a 2 cent fall relative to the 0.6775 high reached on Friday afternoon. Thus the tight trading range the NZD has exhibited through much of February continued, with the currency moving from the top to the bottom of the range in a short space of time. Overnight, the NZD has consolidated and trades around 0.66 at present.

Late last night China cut the reserve requirement ratio by 50bps to 17% for large banks, continuing along the path of gradually easing monetary conditions to help stimulate growth. The move is seen more as symbolic, as PBoC monetary injections have already reduced interbank rates, in an attempt to offset the impact of capital outflows. The announcement caused a temporary 20bps blip up in the NZD, but it wasn’t long-lasting.

CPI inflation in the euro area fell to fresh lows, with both headline and core measures of minus 0.2%y/y and 0.7% y/y respectively coming in weaker than market expectations. This drove a weaker euro, with EUR/USD down 0.5% to 1.0875, taking it back down towards level it started the month.

The euro has been on a weaker path over the last couple of weeks, a combination of the spill-over effect from a weaker GBP and expectations of further ECB stimulus next week. The weak inflation data seal the deal for the ECB deposit rate to be cut deeper into negative territory, and some sort of upscaling of the quantitative easing policy.

GBP is showing further signs of consolidation after the hammering it took early last week on Brexit concerns. GBP/USD is up 0.3% at 1.3915.

The AUD is up 0.3% to around 0.7150, helped by higher commodity prices. WTI and Brent crude are trading close to their highs for February, a factor which has been helping support risk assets over the second half of the month.

Somewhat surprisingly, USD/JPY is down 0.9% to just below the 113 handle. The Yen normally weakens, not strengthens, when risk appetite improves. Traders have been increasing their positions on Yen this year and they are now net long, according to IMM speculative positioning data. The net long position is at its highest level in about 4 years. 

Get our daily currency email by signing up here:

BNZ Markets research is available here.