NZD rallies on ECB introducing negative interest rates for deposits; Draghi warns ECB not finished with monetary policy easing

by Raiko Shareef

NZ Dollar

The NZD led major currencies higher overnight, up 0.9% against the USD to just below 0.8500.

Part of this can be laid at the feet of EUR’s rally after the ECB policy announcement last night. But with NZD outperforming across the board, the NZ TWI is 0.3% higher at 79.20.

NZD/EUR initially gained strongly on the ECB announcement, pushing as high as 0.6260. But as EUR’s losses were reversed, the cross came back to settle just 0.5% higher for the day at 0.6220.

The NZD’s outperformance overnight also suggests that the recent decline has run its course for the moment. NZD/USD moved through resistance at 0.8480, and a shunt towards 0.8560 looks possible today. Persistent support at 0.8400 would be tough to break during our day, with markets likely to remain range-bound ahead of US non-farm payrolls.

In yesterday’s note, we pointed out that the slide in NZD/AUD in particular was unsupported by fundamental drivers.

In light of that, last night we issued a short-term trade idea to establish a long NZD/AUD position at the prevailing spot rate (0.9090), targeting a return to 0.9260 following the RBNZ’s June meeting. With any move below the recent low of 0.9062 signalling a reestablishment of downward momentum, we set a fairly tight stop at 0.9040.

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Majors

The ECB was the only game in town overnight, with the Bank delivering a swathe of policy measures to kick-start inflation. Worryingly for EUR bears, though, EUR/USD retraced an initial dive, to sit 0.4% higher for the day, at 1.3650. The USD is weaker across the board.

And it’s not as if President Draghi didn’t deliver. Interest rates were cut largely as expected, with the deposit rate now set at -0.1%, effectively charging banks for holding excess reserves.

Targeted Long-Term Refinancing Operations (TLTROs) will offer up to €400b of cheap four-year funds to banks that pass them to small- and medium-sized businesses. The ECB also extended existing LTROs, and will no longer sterilise purchases of government bonds under a previous programme.

And there’s more to come. At his press conference, Draghi warned that the ECB was not finished. For one thing, the Bank is closely looking at the option of purchasing asset-backed securities as another form of monetary easing. Given the technical difficulties around this approach, it is unclear when this will happen.

Equity and bond markets were unequivocally supportive of the policy package, with the Euro Stoxx 50 up 0.9% and peripheral European government debt 3bps to 8bps lower in yield.

But Draghi will no doubt be more than a little miffed that the EUR is higher than where it was before the meeting. EUR/USD initially dived from 1.3600 to the cusp of 1.3500, with traders likely doubling up on short positions on the way down. This probably exacerbated the rapid unwind, which was possibly triggered by profit-takers exiting their short EUR positions. EUR/USD looks to have tentatively stabilised at 1.3650.

The rally in EUR looks to have inspired a broader USD sell-off, with nearly all major currencies gaining ground. The euro-centric US Dollar Index is understandably 0.3% lower at 80.40, but a broader USD index (BBDXY) is also 0.4% lower.

Attention now turns to tonight’s US non-farm payrolls and accompanying employment report. The market expects +215k, a step-down from last month’s +288k. Given the whiplash following the ECB overnight, markets are probably running into tonight slightly more neutral. It would probably take a number above +250k (and with no undue softness elsewhere) to put the recent USD recovery back on track.

All its research is available here.