ECB President Draghi to expand Bank’s balance sheet by €1tln; Aussie unemployment flat at 6.2%; being long USD against the world appears to be overwhelming strategy

By Raiko Shareef

NZ Dollar

The NZD has seen a whippy 24 hours, but overall has sunk in line with the majors against the USD.

NZD/USD sits 0.5% weaker at just below 0.7700 currently.

Despite multiple attempts to instigate a rapid trip toward 0.7600, the NZD/USD is stubbornly refusing to play ball. Following a position clear-out after the AU jobs report, NZD cracked lower from 0.7730 to 0.7670.

We had thought a break of 0.7680 would trigger further selling, but that was not to be. The currency recovered all the way to 0.7750 overnight, before following the EUR lower.

Today, all eyes on the US jobs report. A market-beating result should see the back of this 0.7700 level in NZD/USD finally broken.

A disappointment could see a move back up to 0.7850. Ahead of those data, we mark 0.7670 as initial support, and 0.7750 as resistance.

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Majors

EUR weakness was a key driver of further USD strength overnight, as ECB President Draghi formalised an intention to expand the Bank’s balance sheet by €1tn over coming months. The broad USD Index is up 0.5%.

Heading into the ECB meeting, investors had picked little change in tone from Draghi, with reports abound of rifts between him and members of his Governing Council. Those claims were thoroughly rebuked yesterday.

First, the policy statement formalised an intention to increase the ECB’s balance sheet toward its early-2012 levels – an expansion of about €1tn from the €2tn level today. There was some doubt about whether the Governing Council would back such an explicit target.

Second, the statement noted that the Council was “unanimous in its commitment to using additional unconventional instruments within its mandate.” Further, it had instructed ECB staff to prepare further measures, for use if required. That second part is fresh news.

We expect that the ‘further measures’ are, in the first instance, more likely to be the purchase of corporate bonds rather than government bonds. That said, we still believe that the ECB will be forced down the latter path eventually. Last night’s events only served to underscore that view for us, and evidently the market, too. EUR/USD is down sharply to 1.2390, a 0.8% fall for the day.

Strangely, the EUR’s decline has been outstripped by that of the GBP, which is off by just over 0.8% to 1.5850. This comes despite fairly positive reads in UK data. Industrial production rose 0.6% m/m vs +0.4% expected, while manufacturing production rose by +0.4% vs +0.3% exp. We suspect that GBP is simply unwinding an undeserved recovery following dismal services data on Wednesday.

The AU employment report showed +24.1k jobs added in October, against a +20.0k expectation, while the unemployment rate stayed unchanged 6.2%. The AUD’s brief pop higher was quickly unwound, and rightly so.

We do not think investors should be taking the report as an accurate gauge of Australia’s economic health just yet. AUD/USD is 0.3% softer at 0.8570, having made fresh lows near 0.8550 yesterday.

The JPY remains a major focus, with investors pushing (successfully) for a break of 115 in USD/JPY yesterday, on no news or data. After touching 115.5, the USD/JPY collapsed to 114.0 in short order.

With key levels being broken across the major currencies, being long USD against the world appears to be overwhelming strategy.

With that in mind, the US labour market report looms large. The market’s rather conservative pick is for a +235k non-farm payrolls gain, down from +248k in September. Clearly, the path of pain lies down a disappointing read. But even then, we would regard that as a relatively minor (and ultimately temporary) blip in the USD’s ascent over coming months.

Elsewhere, the RBA is due to release its quarterly forecasts this afternoon, and Germany set to post industrial production and trade balance data tonight. On Saturday, China’s trade balance data are due. However, we think investors will largely choose to sit on their hands ahead of the US jobs report.

All its research is available here.