Article / 21 July 2016 at 8:48 GMT

From the Floor: RBNZ clears bar for dovishness, ECB up next

Your Next Trade
  • NZD and New Zealand market rates drop on dovish statement from RBNZ
  • Markets seem "extremely complacent" ahead of Thursday's ECB meeting: Hardy
  • Yen falls on report of possibly bigger-than-expected Japan stimulus measures ahead
  • EURUSD teases 1.10 level, but then returns to 1.1050
  • H1 corporate earnings season rolls on
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By John Acher

The New Zealand dollar weakened sharply on Thursday after the country's central bank issued a dovish statement, which appeared to put an August rate cut on the agenda, whereas market expectations for today's European Central Bank seem bland.

Mildly positive sentiment carried over into Asia and Europe from the US overnight, and the Japanese yen softened on a report of possibly heftier-than-expected Japan stimulus measures to come.

The European Central Bank's governing council meets in Frankfurt on Thursday, and is scheduled to make its announcement at 1145 GMT, followed by president Mario Draghi's news conference at 1230 GMT.

”Risk appetite is pretty healthy here in the Asian session. We see USDJPY hitting a new post-Brexit high of 107.50, and some clients have also been prepared for downside in euros ahead of today’s ECB meeting” says Saxo Bank trader Christoffer Moltke-Leth at the bank's Singapore hub.

Saxo Bank's forex strategy chief John J Hardy says there has been some chatter in the markets about the ECB possibly gearing up for doing something in September. 

Some of the options open to the bank could be to extend the horizon of its bond-buying programme, underlining what they are going to do with the targeted longer-term refinancing operations (TLTROs), or even possibly abandon the so-called "capital key" which currently requires the ECB to apportion its bond-buying according to GDP.

But scrapping the capital key is probably too much to expect from today's ECB meeting, Hardy says. 

"The market tried to tease the 1.10 level [in EURUSD], but it is now back to 1.1050 almost this morning.  The market seems to be extremely complacent on the ECB at these levels – I’m not really expecting anything," Hardy says. "I think it will be easy for the ECB to clear the bar and surprise on the dovish side.” 

But Hardy says he could also be wrong, and he noted that EURUSD has been a "hopeless, tightly ranging mess" since the drop after the Brexit referendum in June.

”But so far the euro is pretty resilient [today], rising nearly 40 pips today above the 1.010 handle,” Moltke-Leth says.

Dovishness down under

The RBNZ issued a new economic update, which, Moltke-Leth says, "more or less confirmed" that the bank will cut rates in August and possibly again in November.

”The market was really expecting something dovish, and they managed to clear the bar," says Hardy.  

The new blast of dovishness from the RBNZ follows a very weak inflation data reading this week, and the tighter loan-to-value ratio restrictions that the bank announced earlier in the week.

The New Zealand 2-year yield fell 5 basis points, and it’s down about 15 bps from just a few days ago.

The trade-weighted NZD index is now 6% higher than the RBNZ assumed in its June policy statement. ”And this, of course, is adding pressure to dairy and manufacturing exports, and the RBNZ said that the inflation outlook has really weakened,” Moltke-Leth says.

”So kiwi [NZDUSD] dropped as low as 0.6950 following the statement, and we could probably see a bit more weakness in the days ahead, I would expect," he says.

Hardy says one good way to play kiwi weakness is through its cross with the Aussie dollar, AUDNZD, which he says could have potential to rally considerably.

A bearish reversal took place when the minutes of the Reserve Bank of Australia's July meeting introduced Australian dovishness. ”But the RBNZ has more potential to cut, and I think we are gearing up for something bigger [in AUDNZD]," Hardy says.

AUDNZD seen with scope to rise
Source: Saxo Bank

”And I think, if you look at the likes of NZDUSD and rate spreads, you’re going to see a lot more downside to come,” Hardy says.

If NZD doesn’t punch lower now, then it could wait until the RBNZ’s expected August cut, Hardy says, adding, however, that the picture for NZD is ”definitely structurally kiwi-bearish.” ”We do have a put option for August on NZDUSD,” Hardy adds.

Earnings season in full swing

”We are seeing a positive sentiment sticking to markets, both in the US yesterday and carrying over into Europe and Asia today,” says Saxo Bank’s equities strategy chief Peter Garnry.

Quite a number of companies have managed to surprise positively on earnings, but earnings expectations had been revised down going into the second quarter, Garnry says, and performance has been less positive on the top line.

"It’s the revenue figures that are most important, and that is because we are seeing very low revenue growth in the S&P 500," Garnry says. "This is going to be a theme through earnings season."

Carmaker Daimler reported  revenue in line with estimates and EBIT ex-items above estimates, and said it sees a strong 2016 China market.

Online betting house Betsson posted second-quarter earnings in line with expectations, and said Q3 activity is already significantly above Q2. "We are keeping our long position," Garnry says.

American Express beat Q2 earnings estimates, but revenues missed expectations and the shares fell.

Thursday's US earnings highlights include a report from oilfield services group Schlumberger, which Garnry says will be interesting as the first energy company to report.

Maria Draghi
 The man of the day, ECB president Mario Draghi. 
Photo: Screengrab from ECB webcast

John Acher is a consulting editor at

From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.  

21 July
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