NZ dollar advances against euro as ECB's Draghi signals continued loose monetary policy

Friday 8th August 2014

The New Zealand dollar gained against the euro after the European Central Bank said it would keep interest rates at record lows and loose policy will remain in place for an extended period, widening the divergence with New Zealand where interest rates are expected to resume their track higher following a pause.

The kiwi rose to 63.46 euro cents at 8am in Wellington, from 63.19 cents at 5pm yesterday. The local currency advanced to 84.84 US cents from 84.56 cents yesterday.

The euro weakened after ECB president Mario Draghi said risks to the Eurozone's fragile recovery had increased after Italy slipped back into recession and as a result of the conflict in Ukraine. Draghi signalled the central bank is prepared to print money to buy assets such as government bonds, known as quantitative easing. That suggests European monetary policy will diverge from New Zealand for some time yet, making the kiwi more attractive as a carry trade, where investors borrow in low interest rate countries to invest in countries with higher rates.

"Commentary from ECB president Draghi helped inspire a weaker euro," Kymberly Martin, senior market strategist at Bank of New Zealand, said in a note. "Draghi sounded more down-beat on the economic outlook, leaving the door open for further stimulus measures. He said the bank is about to consult on the purchase of asset back securities."

In New Zealand today, Finance Minister Bill English is scheduled to speak to the Waikato Chamber of Commerce in Hamilton.

The New Zealand dollar edged up to 91.36 Australian cents from 91.26 cents yesterday after data yesterday showed Australia's unemployment rate rose to a 12-year high of 6.4 percent in July from 6 percent in June. The Reserve Bank of Australia this week kept its benchmark interest rate at 2.5 percent, and today releases its Statement on Monetary Policy, setting out the bank's assessment of current economic conditions, both domestic and international, along with the outlook for Australian inflation and output growth.

Traders will also be eyeing reports from China today, including its latest trade balance, inflation and loans data. China, Asia's largest economy, is the biggest trading partner for New Zealand and Australia.

Tonight, UK and German trade balance data will be released along with the Canadian employment report.

The kiwi gained to 50.37 British pence from 50.18 pence yesterday after the Bank of England yesterday kept its benchmark interest rate at a record low as expected.

The local currency edged up to 86.52 yen from 86.47 yen yesterday ahead of the Bank of Japan meeting today, where no change is expected. The trade-weighted index advanced to 79.56 from 79.39 yesterday.

BusinessDesk.co.nz

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