The New Zealand dollar was the weakest major currency on Wednesday as its central bank joined the dovish global chorus of monetary policy makers.
The accommodative policy shift from New Zealand comes as European Central Bank President Mario Draghi said the central bank was starting to worry about the side effects of negative interest rates, but remained ready to act if the eurozone economy showed further weakness.
The New Zealand dollar NZDUSD, +0.0294% which fell sharply after a dovish policy update from the Reserve Bank of New Zealand, was the worst performer among G-10 currencies.
“Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,” said the central bank. During its last update in February, the central bank noted that the next rates move could either be up or down.
The kiwi last bought $0.6797, down 1.6% against its U.S. rival, its lowest level in nearly three weeks, according to FactSet data.
“The RBNZ appears to be the first G-10 central bank signaling that its next move is more likely to be a cut, instead of a hike. Yes, the Fed and the ECB turned dovish at their latest meetings, dismissing any hikes this year, but they have not yet turned their eyes to the cut button,” said Charalambos Pissouros, senior market analyst at JFD. The Reserve Bank of Australia also said that the probabilities of rates moving up or down were balanced
New Zealand’s statement comes as the ECB earlier downgraded its outlook for eurozone growth this year to 1.1% from 1.7% and rolled out a fresh batch of bank stimulus, as Italy entered a recession and Germany’s economy was showing signs of contraction.
Speaking at a conference in Frankfurt on Wednesday, Draghi said: “If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any.” The 10-year German bond TMBMKDE-10Y, -466.42% known as the bund, deepened its slide into negative territory, at negative 0.078%, compared with 0.018% on Tuesday, amid the ECB president’s comments.
Data last week showed that the total sum of negative-yielding bond issues represented in the Bloomberg Barclays Global Aggregate Bond Index AGG, +0.21% stood at 9.7 trillion, marking a more than 50% increase from September.
The euro EURUSD, +0.0534% was slightly stronger against the dollar, buying $1.1249 compared with $1.1267 late Tuesday.
Elsewhere, traders were focusing on the British pound ahead of the result of some key Brexit votes.
The British pound GBPUSD, -0.2426% was in positive territory early Wednesday, as market participants were awaiting the results from votes on Brexit alternatives in the U.K. Parliament. After the House of Commons seized control of the Brexit process, various alternatives to Prime Minister Theresa May’s withdrawal plan, ranging from a second referendum to a customs union, have been voted on.
Brexit Brief: MPs prepare to vote on Brexit options
The implications for the pound are as varied as the Brexit options themselves.
Sterling last bought $1.3245, up from $1.3206.
“The decision to open the vote to any option has spooked several hard-line Brexiteers causing them to line up behind the prime minister rather than risk a long Brexit delay. However, though avoiding a swift but hard Brexit is good news for the pound, going into a protracted period of uncertainty would continue to damage domestic industries and the currency,” wrote Fiona Cincotta, senior market analyst at City Index.
Meanwhile, May said in an earlier address to Conservative backbenchers that she would step down as prime minister if her Brexit deal wins the support of Parliament.
Her government is against Wednesday’s so-called indicative votes and the cabinet will be abstaining from them. May also said on Monday that she won’t necessarily accept the plan that results from the indicative votes.
The U.S. dollar, meanwhile, as measured by the ICE U.S. Dollar Index DXY, +0.17% was up 0.2% at 96.895.
The U.S. trade deficit for January stood at $51.1 billion, less than expected and in the prior month, as the trade conflict with China disrupted the flow of goods.
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