By Danica Hampton

For the most part it probably appears as though markets have taken something of a breather, as we open this morning with the NZD at the 0.6350 level, and major currencies also little changed from 24 hours ago.

The reality though is a fractious overnight session where updates from the ECB, BoE and BoC (see next section) had passed with little change or fuss but flows seen to be associated with the unwinding of currency hedges for the proposed Chinalco - Rio Tinto deal sent the AUD and GBP sharply lower, so of course the NZD trailed in their wake.

For a period of time in the London afternoon the sharp sell off in GBP and AUD held sway for traders and clients alike, though eventually a mix of real money and macro accounts showed a bias to sell USD and sparked a recovery to this morning's opening levels.

The ANZ commodity export prices for May, published yesterday afternoon, were mixed. The world price index increased 2.7%, naturally supported by the falling US dollar by which most of the index is denominated. Wool and beef saw decent gains, as did the dairy world price index, interestingly enough, with +5%. The latter is in sharp contrast to the big fall registered in Fonterra's latest auction.

The weekly agri-fax series we monitor was about flat for May. It's hard to know which of these three world dairy price series to trust. At least the auction price, while representing just a portion of Fonterra's sales, is a verifiable transacted price, rather than a reference-type prices as denotes the ANZ and agri-fax series. But then the latter two are more general in their dairy product coverage. In any case, all of the dairy indices have been suppressed by the rising NZ dollar. The ANZ dairy index, in NZ dollar terms is down 32.5% on a YOY basis.

The overall NZD-denominated commodity price index fell 1.5% in May, increasing the annual decline to 11.2%. Overall, it's a depressing force - in contrast to the important buffers commodity returns gave the NZ economy during the 1998 recession and, especially, through the 2000/01 global downturn.

Traders today will continue to eye the 0.6375/0.6400 area as continued resistance following Wednesday evening's sharp sell off. As we've noted in recent weeks, the NZD's fortunes will ultimately mirror those of the major currencies. Immediate support on the day should be evident on any pullback to the 0.62750.6300 level, though a breach would encourage those looking for a deeper pullback for the currency in the days ahead.

The Bank of England's Monetary Policy Committee surprised no one today in keeping its key policy rate at 0.5% and maintaining the programme of asset purchases at £125billion. There was little chance of a move by the Bank today. In May the Committee voted for an extension in QE by £50billion, against a backdrop of its latest forecasts showing a gradual recovery in 2010 but with inflation still below target in two years time.

With only one month's extra data from that decision and a fairly patchy evidence base on the effectiveness of QE, there was no pressure on the Committee at all to extend the purchases further. That leaves the next two meetings as somewhat more interesting. It could be the Committee votes at the July meeting to use up the remaining £25 billion of the QE headroom granted it by the Chancellor , but it is probably more likely to wait until the August Inflation Report round.

As expected the ECB kept rates on hold today at 1%. Trichet described current rates as 'appropriate' after taking into account the decision in May to purchase a range of assets. Further detail on the ECB's 'enhanced credit support measures' was also given. As foreshadowed in May, the ECB will purchase €60 billion of euro-denominated covered bonds, using direct purchases in both primary and secondary markets. The ECB intends to start its purchases in July, with the €60 billion being doled out over the next 12 months, which implies monthly purchases of €5 billion. Yet, it seems that tensions within the ECB are still causing operational difficulties. Trichet could not answer whether the purchases would be front-loaded or evenly-spaced.

The BoC displayed sensitivity to FX moves in it's post-meeting statement, referring to the improved financial conditions, commodity prices and economic confidence but noting "the rapid rise in the CAD "¦ could fully offset these positive factors" and it ""¦retains considerable flexibility in monetary policy"¦"

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* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.