The euro yesterday whipsawed as major new stimulus measures by the European Central Bank were offset by a signal from ECB chief Mario Draghi that it will only cut interest rates again in the most extreme of circumstances.
Markets had initially roared their approval as the ECB cut its rates to fresh record lows and said it would start buying corporate debt for the first time and effectively begin paying banks to borrow from it to lend to companies and households.
Shares jumped 2.5 per cent, eurozone bonds rallied and the euro initially dropped over a cent to $1.0820, but the mood turned as Draghi signalled years of interest rate cuts may finally be at an end.
“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” Draghi said, referring to the bank’s asset purchase programme, which is due to end in March 2017.
But “from today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate thatit will be necessary to reduce rates further”.
The euro was yanked up three cents to a three-week high of over $1.1125. European shares erased most of their gains too as Wall Street’s main markets also struggled to stay in positive territory in New York.
“Pretty much the key thing was that Draghi drew a line under further rate cuts,” said head of European Currency Strategy at TD Securities Ned Rumpeltin, noting that it was the biggest move in the euro since the ECB’s December meeting.
“That was a very clear broadcast and will be the final takeaway for people today.”
Bond markets were also buffeted by Draghi’s mixed signals. Short-term bond yields were set for their biggest daily rise in three months having initially fallen, and though Italian and Spanish bonds saw their yields nod lower, money market rates rose as investors significantly reduced bets on further rate cuts this year.
Oil prices, the sharp fall in which over the last one-and-a-half years has been one of the key drivers for the slump in inflation, were also starting to backslide again.
Benchmark Brent futures were back to $40 a barrel, US crude was last at $37.50 and safe-haven gold climbed to $1,264 an ounce.
The big surprise in Asia overnight came from New Zealand’s central bank, which pre-empted the ECB by cutting its main interest rate to a record low 2.25 per cent.
The Kiwi dollar tumbled to $0.6618 and Reserve Bank of New Zealand governor Graeme Wheeler cited China as a major risk, reflecting global concerns over a slowdown in the world’s second-biggest economy.
Asian stocks edged up, meanwhile, encouraged by the previous day’s rally in crude prices and expectations that an aggressive showing from the ECB later could see dovish reactions from the Bank of Japan, Fed, Swiss National Bank and Bank of England which all meet over the next week and a bit.
MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.3 per cent. Volatile Shanghai stocks, however, dropped two per cent after stronger-than-expected local inflation data was interpreted as a negative for the struggling economy.
South Korea’s KOSPI rose 0.8 per cent and Hong Kong’s Hang Seng gained 0.6 per cent. Japan’s Nikkei climbed 1.3 per cent.