Euro pressured ahead of ECB, kiwi skids on RBNZ rate cut

The euro came under bearish pressure in Asian trade on Thursday ahead of a European Central Bank meeting that is expected to result in further easing steps, while the kiwi skidded after the Reserve Bank of New Zealand surprised with an interest rate cut.

The New Zealand dollar NZD=D4 nursed losses after tumbling more than a cent after the RBNZ’s decision to cut its official cash rate by 25 basis points to 2.25 percent, citing a material decline in a range of inflation expectation measures. The central bank also signaled at least one more rate cut to come.

The New Zealand currency was last down 0.3 percent at $0.6635 after dipping to a one-week low of $0.6618, well below its overnight high of $0.6809.

The ECB is expected to cut the deposit rate by 10 basis points to -0.40 percent, announce more asset purchases and possibly introduce tiered interest rates like the Bank of Japan in a bid to boost inflation, according to a Reuters poll published on Monday.

“This is probably not a consensus view, but the market is almost pricing in the entire kitchen sink from the ECB, and I think it’s setting itself up for disappointment,” said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management in Portland, Oregon.

While tighter financial conditions a month ago may have warranted more drastic easing steps, some of those conditions have showed signs of improvement, she said, and therefore she expects only a further cut in interest rates into negative territory and a modest increase in purchases under the quantitative easing program.

“The size of their response has to be directly related to stress in the market,” Vail said, adding that the euro could get a bump higher after the policy meeting outcome.

The common currency was down 0.2 percent at $1.0977 EUR= though it clawed back ground against the yen, rising 0.2 percent to 124.86 EURJPY=.

The dollar gained 0.4 percent to 113.26 yen JPY=, benefiting from waning risk aversion after data showed inflation in China stronger than forecast.

But the dollar remained well within the range it has traded so far this month.

“The market seems to be very cautious today, ahead of the ECB meeting, and next week, we have the BOJ,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

In other central bank action, the Canadian dollar gave up some gains made overnight after the Bank of Canada left policy rates unchanged and said its economic outlook was largely the same as in January as recent market volatility “appears to be abating.”

While the Canadian currency has firmed since hitting a 12-year low of C$1.4474 in January, it is still significantly weaker than it was a year ago. The greenback was last up about 0.2 percent at C$1.3275.

Source: Reuters