EUR buoyed by increased policy easing. USD still under pressure; NZD and AUD print fresh highs. Global rates track higher, even as equities take a breather

Global equity markets have taken a pause after their recent strong rally, but even so, the USD remains under pressure – even with US rates rising more than others. The NZD and AUD have printed fresh highs, while EUR has surged higher as the market embraces the news on increased policy support to drive an economic recovery.

The focus has been on Europe over the past 24 hours, with the theme de jour being increased monetary and fiscal policy easing. After we went to press yesterday Germany’s government agreed on a new €130b fiscal stimulus package (3.8% of GDP), much larger expected, suggesting that the country is going “all-in” to drive a recovery, never mind previous constraints about running a balanced budget. The policy measures included a temporary 3 percentage point cut to the value-added tax and increased welfare payments.

Last night, the ECB over-delivered on market expectations, expanding the Pandemic Emergency Purchasing Programme by $600m to $1.35b, extending the bond-buying through to at least the end of June 2021, and reinvesting maturity assets through to at least June 2022. The increase was $100b ahead of market expectations, and some had argued any increase should be tactically delayed ahead of the EU’s decision on the Recovery Fund, so there were clears signs that the ECB wants to get ahead of the curve, and it will effectively be buying all the extra financing requirement of governments.

Justifying the action was a sobering set of forecasts, with the euro area economy contracting 8.7% in 2020 (and as much as 12.6% if there is a second wave of COVID-19 cases), CPI inflation still only 1.3% by 2022, and a tightening in financial conditions.

These policy moves helped drive European currencies higher, with EUR up over 1% overnight to 1.1360, extending its rally over the past couple of weeks to 5%. Peripheral bond spreads narrowed, with Italy’s 10 year rate down 13bps to 1.42% against a 3bps rise in Germany’s 10 year rate to minus 0.33%.

The strength in EUR came despite reports that Finland rejects the €750b EU Recovery Fund in its current form – an EU-wide fiscal initiative that has been proposed but yet to be agreed – adding to the “Frugal Four” who also don’t like the extent of grants to be given to troubled nations. EU leaders will debate the Fund later this month.

There’s a sense that the US is getting behind the curve with its fiscal response. While there is talk of further fiscal stimulus worth up to $1 trillion, the Senate’s Majority Leader McConnell has said that there are no plans for this ahead of the July recess, meaning no action until late-July at the earliest.

Meanwhile, US initial jobless claims continue to track lower, although with the level still remaining highly elevated at 1.88m, taking the cumulative total since mid-March to 43m, and continuing claims running at over 22m over the past four weeks. There’s a hint that the worst is over for the labour market, but it’s a long road back to normality. The data comes ahead of non-farm payrolls tonight, with the consensus expecting “only” 8m lost jobs in May, an “improvement” from the 20.5m job destruction in April.  The unemployment rate is expected to surge to 19.5%.

US 10-year Treasuries have broken above the top end of its April-May trading range, seeing the yield up 7bps to 0.82%, its highest level since late-March. There has been no obvious trigger for the move, but with the Fed’s backstop it is hard to see the move extending too much further. The move has come even as US equities take a breather from their recent strong rally, with the S&P500 index currently down 0.4%.

Higher US rates haven’t prevented further weakness in the USD, seeing it down 0.4-0.7% for the day on the various indices, extending its losses of the past few weeks. Even though equity markets are weaker, there is a risk-on feel to currencies, with JPY also lagging, while the 0.7% gain in CHF overnight can be linked to the strength of the euro.

The NZD peaked just under 0.6480 overnight, a fresh multi-month high, while AUD peaked just under 0.6990. Yesterday we published upgraded forecasts for both currencies for the year ahead, with their recovery coming ahead of schedule, although there’s a hint of some over-extension over the past few days with both currencies sitting at least a couple of cents higher than justified by our short-term models. NZD/AUD pushed up through 0.93 yesterday, a short-term correction to what still feels like a weaker trend that is expected to extend into the second half.

While EUR strength sees NZD/EUR slip back below 0.57, the NZD is up on the other crosses, with NZD/JPY extending its strong rally to now sit at 70.5, some 11% higher than the mid-May level.  Shame the 2020 Tokyo Olympics got delayed.

NZ rates were higher yesterday, up 1-3bps for the government curve and up to 1bp for the swaps curve. We’d expect to see some further extension of those moves today, with global forces in the driving seat.