ECB to halve its bond purchase program to €30 bln in January, EUR weaker and European rate lower on the day; NZD continued lower trend on stronger USD; long dated local swap rates rise a touch

By Jason Wong

The USD is stronger across the board on increased confidence that a tax reform package can be delivered while the EUR fell after the ECB’s “taper” announcement.  UST yields remain steady against lower European rates.

The ECB’s policy announcement had been eagerly awaited for some time and the announcement on the tapering of its asset purchase programme was line with the consensus.  The ECB said it would halve its monthly bond purchases to €30 bln per month from January and keep buying until the end of September next year, “or beyond if necessary”. The ECB also reiterated that interest rates would remain at their current levels well past the end of the asset purchase program.

ECB President Draghi is one of the most market savvy central bank leaders you’ll ever meet and he managed to engineer a weaker EUR and lower European bond rates on the day, despite the taper announcement (a word he avoided, preferring the term “recalibration”).  He added that there wouldn’t be a “sudden end to the buying”, teasing the market and the open-endedness creating the impression of a dovish taper.  EUR has fallen by over 1% since the announcement and has yet to find a floor, probing the 1.1660 area and pushing NZD/EUR up to 0.5865.

USD strength has supported the move down in EUR, with the market liking the Congress vote in favour of the Budget resolution that helps pave the way for Trump’s tax reform package, with a goal of it being decided by the end of the year.  There was an added boosted after Politico reported that both Yellen and Warsh were out of the race for the Fed Chair position next year, making it a two-horse race between Powell and Taylor.

The NZD has been out of the spotlight, but the broadly stronger USD sees the currency continue to trend lower, down to around 0.6840.  The NZD is looking oversold on domestic political factors, but the recent resurgence we’re seen for the USD mutes the prospect for a near-term recovery at this stage.  Our short-term fair value model estimate sits just under USD0.73, supported by very high levels of risk appetite.  When we stress-test our model with a 10% fall in commodity prices, a 20 percentage point reduction in our risk appetite index and a 50bp narrowing in NZ-US short rate spreads, we get a fair value estimate of USD 0.68.  It suggests that the market already prices in a lot of negative news for the NZD, which should limit further downside risk from here.

The AUD weakened a little last night after RBA Deputy Governor gave a fairly dovish speech, indicating that measured CPI was over-stated by an average 0.25 percentage points per annum and that “there still remains a sizable degree of spare capacity in the labour market”.  NZD/AUD rose temporarily above 0.8950, but has since eased to 0.8920.

JPY has outperformed against all but the stronger USD.  Reuters reported that PM Abe will order an extra budget by year-end to give impetus to his economic agenda.  USD/JPY is up modestly to 114, while NZD/JPY has slipped just below 78.

In the bond market, US 10-year Treasury yields have traded in a 2.41-2.45% range, with the positive US news offset to some extent by lower European rates.  Germany’s 10-year rate is down 7bps to 0.41% after the ECB’s dovish taper announcement.  NZ rates were little changed yesterday across the government curve, while long-dated swap rates rose a touch.  The 10-year rate rose by 2bps to 3.23% and the 2-year rate was flat at 2.17%.

Tonight sees the release of US Q3 GDP data which is expected to show annualised growth of 2.6%, keeping the Fed on track for a December rate hike which is now priced at more than an 80% chance.


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