€1.1 trillion stimulus boosts markets

Photo / Thinkstock

European Central Bank’s ambitious bond-buying plan helps drives the NZ stockmarket to a record high

The New Zealand dollar rallied against the euro, fell sharply against the US dollar, and world share markets surged on the European Central Bank's (ECB) decision to embark on an ambitious bond buying programme to try and rejuvenate the eurozone's stalled economy.

The ECB's move to buy up to €1.1 trillion ($1.66 trillion) in bonds drove the euro down to new 11-year lows, sending the US dollar sharply higher, which in turn put downward pressure on other currencies - kiwi included - against the greenback.

The kiwi, which had already been weakening against a stronger US dollar, fell by 80 pips to US75c before partly recovering to US75.14c late in the day.

The prospect of world interest rates remaining low, and the possibility of a successful kick-start for Europe's economy, drove share markets higher.

In New Zealand's case, the NZX50 Index jumped by 66 points, or 1.2 per cent, to a record 5712.661. Markets in the US, Japan and Australia were also stronger.

The euro/US dollar rate dropped to US$1.14 - its lowest level since late 2003 - after the ECB announced its move, which is aimed at kick-starting the economy and stopping deflation from becoming more entrenched.

But the main factor weighing on the kiwi/US rate was growing speculation that the Reserve Bank may cut interest rates later in the year in view of a very low inflation outlook.

Adding weight to the New Zealand rate-cut argument was the Bank of Canada's surprise decision this week to cut its key interest rate by 0.25 of a percentage point and a similar move from Denmark's central bank.

Market participants were drawing parallels between New Zealand, Canada, and Australia - all countries vulnerable to weakness in commodities markets.

Last week, the Swiss National Bank accurately foresaw the ECB's move and the resulting demolition job on the euro and opted to stop defending the peg between the Swiss franc and the common currency.

While a rate cut in New Zealand is not seen as likely, markets are nevertheless starting to price in the possibility of one happening this year, in contrast to the last 18 months or so when markets were not giving a cut the slightest chance.

"What I think is weighing more on the kiwi at the moment is the Bank of Canada's decision to cut their interest rates," said Bank of New Zealand currency strategist Raiko Shareef.

Local interest rate markets are now pricing in a 40 per cent chance of a 25 basis point rate cut by the end of the year.

In a move intended to assuage German fears that the measures will take the pressure off Governments to implement reform and rein in their finances, the eurozone's 19 central banks will hold the risk of any losses for 80 per cent of bonds bought.

"With the Greek election due in three days, [ECB President] Mario Draghi held out the carrot to voters that Greece could benefit from the programme as early as July if it remains in an EU-monitored programme," ANZ said.

"So, the ECB has now thrown the kitchen sink at deflation, and markets like it so far."

The plan

• ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions.

• Combined monthly asset purchases to amount to €60 billion.

• Purchases intended to be carried out until at least September 2016, which would take the total out to €1.1 trillion.

• Programme designed to rejuvenate region's economy and head off deflation.