Risks tilted to RBNZ statement not being dovish enough, NZD could head higher; EUR positioning ahead of important ECB meeting tonight

Risks tilted to RBNZ statement not being dovish enough, NZD could head higher; EUR positioning ahead of important ECB meeting tonight

By Kymberly Martin

In a reverse of the previous night’s rankings the AUD and CAD have been the strongest performers while the JPY has been the weakest.

The CAD strengthened after the Bank of Canada left its cash rate at 0.5%. Although no cut was expected by consensus the Bank’s dialogue may have been more benign than some had anticipated. It said the economic recovery was continuing and it saw the risks to inflation as “roughly balanced”. 

The move higher in the CAD in the early hours of this morning was likely also helped by a further rebound in the oil price. Since last evening the USD/CAD has declined almost 1.5%, to 1.3250.

The latest US Energy Information Administration (EIA) report released overnight showed that gasoline inventories dropped more than expected last week. This helped underpin a further 4.0% rise in WTI futures.

The AUD was also boosted by the general uptrend in commodity prices overnight although the iron ore price has given back some of its early-week surge. From early evening lows near 0.7420 the AUD/USD now trades above 0.7520, its highest level since early-July last year.

In the backdrop of firmer risk sentiment, and a commodity sector-led rise in equity markets, the appeal of the ‘safe haven’ JPY waned.

The USD/JPY has trade up from around 112.20, to 113.00 currently. A broad range of trading between 111.00 and 115.00 appears to be establishing itself near-term, largely influenced by shifts in global risk appetite. Over the longer-term we anticipate further JPY weakness as the BOJ implements additional easing and USD strength resumes.

The EUR has had a bit of a surge this morning, dragging the GDP along for the ride. From early morning lows near 1.0950 the EUR/USD now trades around 1.1030. The market may be pre-positioning itself ahead of tonight’s ECB meeting.

The sharp fall in the EUR/USD, from mid-February, may have captured expectations for further ECB easing while the market nudged up expectations for US Fed hikes.

The market may now be getting worried that, as has often been the case in the recent past, the ECB fails to meet its overblown expectations for easing. The official consensus is that the ECB will cut its main deposit rate by 10bps, to -0.4%, though markets may have become hopeful of more.

The NZD/USD has recovered overnight. From early evening lows near 0.6720 it now trades close to 0.6800, ahead of this morning’s RBNZ meeting.

The risks are likely tilted toward the RBNZ’s message not appearing sufficiently dovish, for a market that already prices 40bps of rate cuts for the year ahead. This could result in the NZD/USD its recent rebound. However, we believe that this will fail to gain much momentum. We continue to see the NZD/USD trading down to a cyclical trough around 0.6000 by year-end.

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Kymberly Martin is on the BNZ Research team. All its research is available here.

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