NZDUSD briefly fell to around 0.6850, below December's low, and currently trades at the 0.6875 level; ECB to “keep rates at present or lower levels for extended period of time”; SEK worst performer as Swedish central bank to purchase government bonds

By Jason Wong

There has been a mountain of policy announcements and data to wade through over the past 24 hours but the net result has been modest currency movements, and small changes in equity prices and bond yields.

The only real surprise has been Sweden’s Riksbank announcing that it would purchase an additional SEK15bn of government bonds, with Governor Ingves having to use his casting vote to break the divided board.  The Swedish Krona is at the bottom of the leaderboard, falling 0.7% against the USD.

The real focus for the day though was on the ECB’s policy announcement.  The ECB left policy settings unchanged and, after the communication mishap in March, President Draghi was very careful with his words.  The ECB is not yet sufficiently confident that inflation is converging to target in a sustainable way and growth risks, while moving towards a more balanced configuration, are still tilted downwards.  The central bank retained its pledge to “keep rates at present or lower levels for extended period of time”. Many in the market, including ourselves, see that dovish guidance removed in the June meeting.  EUR traded in an 80pip range and is down slightly for the session at 1.0880.

There were a number of data releases, but these had little market impact.  The key US data releases including durable goods orders, trade and pending home sales slightly disappointed.   The weekly Bloomberg consumer comfort index, which isn’t as widely followed, showed consumer confidence rebounding last week to its highest level since 2001.  Euro-area activity data remained strong, with confidence rising to its highest level in a decade.   Germany CPI inflation rebounded back to 2.0%.

On the policy front, the general reaction to yesterday’s White House announcement on tax reform was one of disappointment.  The “massive” tax cuts have little chance of going through in the proposed form and the lack of detail suggested that much more thought needs to come. It keeps alive the prospect of an easing in US fiscal policy, but any further clarity is still some time away.  More market reaction was been evident after reports came through that Trump would not terminate NAFTA “at this time” following reports earlier yesterday that he would end NAFTA.  The Canadian dollar strengthened but has given up that gain as oil prices have weakened again.  WTI crude fell to as low as $48.20, with Libya’s biggest oil field now operating again, but has since recovered to around $49.  CAD is flat at 1.3620.

The NZD remains unloved and has probed important technical support levels.  It fell to around 0.6850, taking it below December’s low, but that was only a brief excursion and it trades around 0.6875 at present.  We’ll call 0.6850 as a key support level.  A sustained break of that would mean a gap to the next support level of 0.6675.  NZX whole milk powder prices slipped 1.7% yesterday after a report on a big rise in production in March, supported by the wet autumn which allowed plenty of grass growth.  However, we don’t think that was a factor in the softer NZD as the currency didn’t respond to the recent 25% uplift in WMP prices.

Nor does the market seem to be factoring in a likely less dovish RBNZ next month or the improved fiscal settings.  Yesterday, Finance Minister Joyce gave a pre-Budget speech where he outlined a boost to infrastructure spending and would look to raise income tax thresholds.  The strength of NZ’s fiscal accounts would also enable further debt reduction, with a new medium-term target of net debt falling to 10-15% of GDP by 2025.

The NZD is flat to down on the key crosses, although movements have been modest.  GBP has been the strongest major for no particular reason, seeing NZD/GBP down 0.6% to 0.5330.

The BoJ’s policy meeting was as uneventful as expected, with no change to policy settings and little change in forecasts.  Meeting the inflation target remains a distant prospect, with Governor Kuroda indicating that CPI inflation probably won’t stabilise above 2% until after fiscal 2018, which is two years away.  JPY is little changed, while NZD/JPY is around 76.5.

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