Week in Review: ECB and RBNZ rate cuts

It was a week of Central Bank decisions with the Bank of Canada, RBNZ and the ECB being the main events of the week which saw two rate cuts and a neutral stance. The Bank of Canada decided to leave interest rates unchanged in this month’s meeting at 0.50%, opting instead to wait for the fiscal stimulus measures from the government which is to be presented later this month. The Canadian dollar enjoyed its strong rally with the neutral BoC stance alongside a rally in Oil prices. USDCAD posted strong declines for the seventh week in a row since January this year. Prices fell to a 15-week low, but Friday’s jobs data disappointed as the Canadian unemployment rate edged higher to 7.30% from 7.20%, while the employment change saw a decline of -2.3k against expectations of 10.2k.

The Reserve Bank of New Zealand was the surprise this week as the Central Bank cut rates by 25bps to bring the New Zealand overnight lending rates to 2.25%. The rate cut surprised the markets as many economists expected the RBNZ to hold back from rate cuts at this meeting. Citing a stronger exchange rate in relation to the fall in commodity prices, the RBNZ came down strongly on the Kiwi. NZDUSD slipped on the data falling -1.33% after the RBNZ’s rate cut but managed to recover in the next days.

The European Central Bank was the big event this week and Mario Draghi delivered this time, going a bit beyond what the markets expected. Cutting rates across the board, the ECB’s minimum bid rate is now zero bound while the deposit rates were cut further to -0.40%. The ECB also expanded its QE purchases by another 20 billion which will now include corporate bonds as well. While the Euro fell on the news, the press conference saw Mario Draghi hinting that the ECB would not look at further easing in the near term. This led the Euro to strongly reverse and closed the day with 1.70% gains as the single currency rallied back to trade comfortably above the $1.10 handle.

Other developments this week included the weekly jobless claims rising 259k below the estimates of 272k but it did not help the Dollar much. In fact for most of this week, the US Dollar took a back seat with the Euro flows defining price action.

Japan’s fourth quarter GDP was modestly revised to show a contraction of -0.30%, less than the previous estimates of -0.40%. Ahead of the GDP release, BoJ Governor Kuroda commented on monetary policy noting that there would be no further rate cuts but at the same time said that the Central Bank would not hesitate to act if need be. The Yen was mostly flat this week ahead of the BoJ’s monetary policy meeting due next week.

In the UK, the Pound was showing signs of easing back after prices rallied, nearly recovering the losses from the previous weeks. Data from the UK this week included the manufacturing production which came out modestly better. Bank of England released its views on Brexit but stopped short of expressing its stand. Instead, BoE Governor Carney said that the Bank was prepared for any outcome from the Brexit referendum. The report didn’t really help the GBP which was mostly muted to the release of the report and the comments from Carney and his deputy governor Jon Cunliffe.

Commodities continued to enjoy another week of gains. WTI Crude Oil prices are up an impressive 6.0% for the week with Oil trading at $38 a barrel. Gold prices, which are already trading near a 12/13 month high, saw an initial pause in the week but the rally picked up after the ECB’s decisions. Gold tested new highs at $1283 declining back to trade above the $1270 – $1260 region.

Economic events this week

• Germany factory orders m/m -0.10% vs. -0.40%
• Japan Q4 final GDP -0.30% vs. -0.40%
• China trade balance 210bn vs. 339bn
• BoE Carney speaks on BREXIT
• Canada building permits m/m -9.80% vs. -2.20%
• Australia home loans m/m -3.90% vs. -2.70%
• UK Manufacturing production m/m 0.70% vs. 0.20%
• BoC leaves interest rates unchanged at 0.50%
• RBNZ cuts interest rates from 2.50% to 2.25%
• China CPI y/y 2.30% vs. 1.80%; PPI y/y -4.90% vs. -4.90%
• ECB cuts minimum bid rate to 0% from 0.05%
• ECB expands QE from EUR60 billion to EUR80 billion
• US weekly unemployment claims 259k vs. 272k
• UK trade balance -10.3 billion vs. -10.3 billion
• Canada employment change -2.3k vs. 10.2k
• Canada unemployment rate 7.30% vs. 7.20%