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By Gaurav Kashyap, Alpari ME DMCC
Markets watch for Christchurch earthquake effect on NZ economy
Markets opened this trading week to the news that a 5.5 magnitude earthquake struck the city of Christchurch, New Zealand this morning. It was the second earthquake the city has seen in four months, following the 6.3 magnitude quake which struck back in February. As expected, the NZDUSD pair sold off more than 100 pips on the news and settled below 0.8150 levels at the time of writing.
The quake struck at a rather crucial juncture for the New Zealand economy, one that was finally showing signs of recovery. Just last week in its monthly interest rate decision, the Reserve Bank of New Zealand held rates unchanged at 2.50%, but more importantly RBNZ governor Alan Bollard employed a less than dovish tone and reiterated that the steady recovery following February's earthquake would see gradual increases in rates over the next two years. The markets will await to see the full effect of this morning's earthquake, but in the interim the New Zealand economy will remain fragile with growth coming under a large question mark.
Trichet tone points to coming ECB rate hike
In the other rate decision of last week, the ECB held rates unchanged at 1.25% and it was Trichet's hawkish tone which saw initial support coming into Euro crosses. The words 'strong vigilance,' has become synonymous with the ECB president and almost confirms a rate hike will come the next time they meet come July. EURUSD rallied to an intraday high of 1.4650 before slipping lower as investors turned their focus from interest rate expectations to the latest developments (or lack of) from Greece.
Doubt was the name of the game yet again as the potential of a Greek restructuring came back into focus as a glaring divide seems to be growing between German policy makers and the ECB. Details revealed by the Bundesbank showed that a large share of German banks have reduced their exposure to Greek government debt (thus making it easier for them to support a restructuring) further supported by the German Finance Minister Schaeuble calling for Greek bondholders to accept longer maturities on the debt. This is in direct opposition to the ECB who have ruled out any chance of a restructuring and the uncertainty is likely to continue until possibly June 20th which is when the EU Finance Ministers will meet again to address the issue.
Oil prices fluctuate on Opec, Saudi announcements
Over in the commodity markets, crude traded in a choppy range last week, driven in large part by speculation building up to the Opec decision as well as the fallout following the meeting. Prices dropped at the beginning of the week as speculation was rife that the oil cartel would in fact be increasing output, and as those rumours failed to materialise with Wednesday's announcement, the WTI contract quickly reversed to rise past 102 per barrel.
The rally was short lived however, with the contract shedding more than -2.95% on Friday as Saudi Arabia announced that they would raise production in the coming weeks, despite Opec's calls to hold. According to the Saudi newspaper, Al Hayat, Saudi oil officials said production would increase by 700K barrels a day in July.
BoE, RBA hold rates unchanged
In the other rate decisions of the week, the Bank of England held rates unchanged at 0.50% with no change to their £200bn asset purchase plan. The announcement was followed up by comments this morning from BoE chief economist, Spencer Dale, that long-term inflation expectations are well in line with target levels. Dale wrote that although short-term inflation levels remain high, they are not affecting wages.
And finally, the Reserve Bank of Australia also held rates unchanged at 4.75%. In the attached comments, Governor Stevens said that close target inflation levels over the next 12 month would be likely. AUDUSD sold off following the news, as many viewed the comments as dovish in nature. AUDUSD was trading just down to 1.0550 levels at the time of writing, following New Zealand's earthquake.
Staff
