The BoC to cut their key rate by 25bps to 0.75%

Overview

Heading into the European open, antipodean currencies garnered some attention in the wake of yesterday’s surprise decision by the BoC to cut their key rate by 25bps to 0.75%. The decision subsequently prompted speculation the RBA could reciprocate similar action and RBNZ to halt its tightening cycle. The current OIS pricing now shows a 32% chance vs. yesterday’s 19% of a February RBA rate cut. Thereafter, FX markets traded in a relatively tentative manner as participants said on the sidelines for the widely anticipated ECB policy announcement.

In terms of the rate decision, the ECB kept rates on hold as widely expected, although the decision was followed by a statement from the ECB saying they are to release further measures at ECB President Draghi's press conference.

In terms of the press conference, as was expected, Draghi unveiled the QE programme that participants were awaiting. However, contrary to the source comments yesterday, the ECB said they are to buy EUR 60bln a month and not EUR 50bln, with the programme to run through to at least Sept’ 2016, thus making the overall size of the programme larger than anticipated. This saw an immediate spike lower in EUR/USD and other EUR-related crosses. Further to this, the overall programme was taken largely positively, with the ECB also sweetening the terms of the TLTRO, buying across the curve, including Greek debt and sharing the risk-bearing in an 80/20 split, thus keeping the Germans relatively appeased.

Since the programme was viewed as ‘going above and beyond’ by the ECB, this subsequently saw EUR/USD move to its lowest level in 11 years, below 1.1500, and EUR/GBP at 7 year lows below 0.7600. With EUR/USD moving lower, the USD-index hit an 11-year high, due to policy divergence between the Fed and ECB, which has in turn weighed on WTI and Brent and thus saw some commodity currencies trim earlier gains.

Furthermore, in response to the policy announcement, the Danish Central Bank were forced to take action and cut their rate for the second time this week and saw the DKK claw back some of its gains against the EUR with there also being talk of central bank intervention earlier in the session.