ECB inspires volatility with rate cut but warns no further downward moves may be delivered; NZD/USD consolidates above 66.5c reversing some of yesterday's move lower

By Kymberly Martin

The EUR led many currencies on a merry dance overnight. The EUR/USD has ultimately strengthened, while the CAD and AUD have underperformed. The NZD/USD sits around 0.6670 after consolidating overnight.

The RBNZ will no doubt have been pleased to see the sharp decline in the NZD yesterday morning, after its surprise announcement to cuts its cash rate to 2.25%.

Both the NZD/USD and NZ TWI currently sit around 2.0% below yesterday morning’s pre-meeting highs. However, after the initial gap lower, the NZD quickly composed itself and has consolidated above 0.6650 overnight. Downward momentum may prove short-lived.

As seen with the ECB’s announcement overnight (more below), Central Banks’ attempts to help their currencies lower tend to only work as long as there is always promise of further easing.

However, we ultimately believe that the NZD/USD will trade lower, to a cyclical trough in the region of 0.6000, as the market refocuses on other issues. e.g. the weakness in the NZ dairy sector and the prospects for tightening in the US labour market to drive further Fed rate hikes.

The ECB inspired quite a bit of volatility in currencies overnight after its announcements. The EUR/USD initially fell as the Bank delivered its expected rate cut, but rallied back strongly as President Draghi suggested that no further cuts might be delivered.

From early morning lows below 1.0850, the EUR/USD now trades at 1.1180. Conversely, the USD index now sits around 1.2% below its pre-ECB levels, despite an initial lurch higher.

The CAD is again on the back-foot as it follows the resumed slump in the oil price, in the early hours of this morning. WTI oil price futures are currently down around 2%.

The AUD has been somewhat on the side-lines of all of the action over the past 24-hours. However, it sits a little lower this morning, at around 0.7440. The NZD/AUD fell abruptly after the RBNZ’s meeting, from 0.9040 to 0.8880. However, it consolidated yesterday afternoon before creeping higher overnight. It now trades at 0.8960.

The greater losses for the NZD have been against European peers. The NZD/EUR was battered by the double-whammy of the RBNZ announcement and the post-ECB strength in the EUR early this morning.

The NZD/EUR has lost almost 3.5% since this time yesterday morning, to trade at 0.5970. Similarly, the NZD/GBP has dropped to 0.4660.

There is a relatively low key cluster of offshore data releases tonight. However, a handful of China data releases due this weekend, including industrial production and retail sales, may set sentiment at the start of next week.

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