Eurozone QE program extended, disappoints market who expected more; carry trade play behind recent NZD and AUD strength against USD

Eurozone QE program extended, disappoints market who expected more; carry trade play behind recent NZD and AUD strength against USD

By Raiko Shareef

EUR is sharply higher after the ECB eased policy, but by less than expected. The USD is broadly weaker, with high-yielding currencies underperforming. A late rally in oil prices helped to support AUD and NZD.

The scale of EUR/USD squeeze higher goes to prove the weight of expectation placed on the ECB. While the ECB Governing Council would no doubt have been briefed on market positioning, it delivered the amount of easing it deemed necessary. History is littered with instances of central banks being bullied into action by markets. Last night was not one of those times.

The market was disappointed by the scale of the deposit rate cut (just 10bps to -0.3%) and the fact that monthly bond purchases remained at €60b per month, albeit now extended out to at least March 2017. This takes the total size of the QE programme from about 10% of euro-zone GDP to around 15%, well shy of the US’ 25%.

It appears that ECB President Draghi wants to keep some ammunition on hand if conditions worsen, and the relatively modest programme implemented today will appease the more hawkish elements of the Governing Council. But he has also hobbled his ability to move markets with rhetoric alone, since this recent experience has been much more talk than material action.

The fact that NZD/USD and AUD/USD actually fell after the announcement (while EUR/USD gained strongly) confirms our suspicion that their recent outperformance owed much to a carry trade play. Late in the session, commodity currencies gained some support from a surge in oil prices, which was likely speculative ahead of tonight’s key OPEC meeting. Production cuts are on the agenda, but no significant reductions are expected.

NZD/USD sits above yesterday’s levels, but shy of testing resistance at 0.67. We still expect that NZD will struggle to break through there in the near-term, but a weak set of US employment reports tonight could do so.

The focus on those reports will have been heightened after a disappointing result from the non-manufacturing ISM survey last night. Still, at 55.9, it indicates a services sector that remains very healthy. Tonight, the market is expecting a 200k gain in non-farm payrolls, and the unemployment rate to remain steady at 5.0%.


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Raiko Shareef is on the BNZ Research team. All its research is available here.

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It appears that ECB President Draghi wants to keep some ammunition on hand if conditions worsen, and the relatively modest programme implemented today will appease the more hawkish elements of the Governing Council. But he has also hobbled his ability to move markets with rhetoric alone, since this recent experience has been much more talk than material action.

For very good reasons.

The sum total of all these efforts has been nothing:
European “inflation” since September 2011, unsurprisingly, has been falling steadily if unevenly with the usual monthly variations here and there. Again, there is no discernable correlation between “money printing” and inflation just as there has been none in related lending (aside from the internal financial front-running).
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He might be lucky to escape with his life.