In a bid to stimulate the flagging eurozone economy the ECB cut their main refinancing rate by 25 basis points to 0.25%

by Mike Jones

NZ Dollar

After sleeping through most of this week, currency markets received a rude awakening from central banks overnight.

The ECB cut rates, the Czech National Bank intervened aggressively, and a very positive US GDP outturn added to the volatile mix.

The net of all this is that the EUR has given up more ground and the US dollar has strengthened across the board. Conviction levels are not particularly high though, with tonight’s US non-farm payrolls report looming large in traders’ minds. As a result, currencies are a little flighty.

With the focus elsewhere, the NZD was largely lost in the wash overnight.

The NZD/USD did feel the pinch of the stronger USD, but strength in NZD/EUR (after the ECB cut) and NZD/AUD (after yesterday’s weak Aussie jobs figures) has helped to shore up the downside. In the end, the NZD/USD simply settled a little lower than yesterday around 0.8350.

Looking ahead, there is every chance the currency excitement continues in the short-term with a heavy schedule of event risk set to buffet markets. During today’s session, Chinese trade numbers (due sometime this afternoon) will be closely watched to see if last month’s weakness in exports continues (1.7%y/y exports and 7.4%y/y imports expected). Signs of softness here would weigh on the NZD.

There’s also Chinese CPI, industrial production, and retail sales figures to monitor over the weekend, US payrolls tonight, and a string of Fed officials lining up to speak (including Bernanke at the IMF). Short-term support for the NZD/USD should kick in around 0.8305, with deeper support eyed around 0.8215. Initial resistance will be encountered on bounces to 0.8430.

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Majors

It’s been an action-packed night in FX markets, with the USD again emerging stronger. Admittedly, this was mostly a story of EUR weakness.

On Wednesday we highlighted the way relative fundamentals were moving against the EUR. This theme certainly continued overnight.

The ECB surprised markets by cutting its main Refinancing rate 25bps to a record low 0.25%. With most not expecting a move until later in the year, the EUR was crunched.

From 1.3500, the EUR/USD quickly shed 2 cents to 1.3300. However, ECB chief Draghi’s insistence the ECB is not targeting a lower currency (the high EUR apparently wasn’t even discussed) looks to have been responsible for something of a recovery in the single currency. At around 1.3400, the EUR/USD is currently around a cent above its worst levels of the night.

In the US, investors were encouraged by a solid GDP print. Q3 GDP expanded 2.8% (annualised q/q), well above the 2.0% expected and the strongest in 12 months. US bond yields and the USD/JPY initially soared in response, with the latter piercing 99.40 for the first time since September.

However, the realisation that inventories were responsible for much of the GDP strength (0.8 ppt contribution) triggered something of a reversal in USD/JPY. The fact tonight’s October US payrolls figures are probably more important for Fed tapering prospects, and where the risk is for weakness (120k jobs, 7.3% unemployment rate expected), probably also helped to keep a lid on the USD/JPY and bond yields. Indeed, both have actually finished the night lower than where they began. 

Looking a little further ahead than payrolls, deteriorating EU-US fundamentals leave us more comfortable with our forecasts for EUR/USD to push lower through next year (1.3200 forecast for Q1, 1.2800 for Q4). Further policy easing (in some form) from the ECB looks likely with Draghi overnight emphasising the easing bias of the ECB and readying the region for “a prolonged period of low inflation”. Near-term, we’d look to fade rallies above 1.3600.

Other news:

*Bank of England leaves both interest rates and asset purchases unchanged at 0.5% and £375b respectively (as expected).

*The Czech National Bank kept policy rates unchanged as expected, but shocks the market by intervening to weaken the CZK. EUR/CZK rocketed almost 5% higher.

All its research is available here.