Week Ahead: RBNZ, BoC, ECB, NZD & CAD Upside, Sell EUR Rallies

While EUR has sold off of late, the single currency barely featured in recent discussions with clients about the market impact of the March ECB meeting. Indeed, investors almost universally expect another 10bp depo rate cut and even a QE-extension but seem preoccupied with the impact of the measures on the troubled European financial sector.

We believe the ECB will address the market concerns about the Eurozone banks and consider additional policy measures like ‘tiering’ of penalty rates and purchases of bad loans or other risky assets next week.

What seems less well understood is that any measures to prop up the banks should allow the ECB to impose ever harsher penalties on the holders of residual EUR-cash.

The policies could support European stock markets and attract hedged foreign inflows where investors buy the stocks but sell EUR. They could further boost domestic appetite for EUR-denominated bonds, issued by non-residents. The borrowers can then convert the EUR-proceeds into USD to repay expensive USD-debt.

Elsewhere, investors will focus on the BoC and RBNZ meetings. Both should keep rates on hold and keep their outlook little changed despite the recent improvement in the data. This could help NZD and CAD recover as market shorts are unwound and risk appetite improves further on the back of positive economic surprises from around G10. Indications at the NPC that the Chinese government will maintain an ambitious growth target for 2016 (6.7% or higher) could also fuel bets on further (fiscal) stimulus and support market risk sentiment. 

What we’re watching:

EUR: Next week’s ECB monetary policy announcement should prove sufficient in keeping EUR a sell on rallies.

CAD: Given little scope of the BoC turning more dovish next week, the CAD is likely to remain supported.

NZD: Regardless of softer growth and inflation conditions the RBNZ may refrain from easing further. As such the NZD may face upside risk.

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