Euro Soft Ahead Of ECB, New Zealand Dollar Tumbles On Unemployment

Euro remains generally soft as markets are awaiting today's ECB meeting. ECB is widely expected to hold its key interest rate at 1%, without a doubt. There have been increasing calls for restart of the Securities Markets Program, or SMP as Spanish 10 year yield has been pressing 6% level for some time.

Meanwhile, Italian 10-year yield also stays above 5.5% level. Markets are getting nervous that Spanish yields could continue to march higher and eventually breach the unsustainable 7% level given the uncertainties on Spain's ability to fulfil its budget target. However, it seems that ECB is not ready to restart the SMP yet just after pausing it for less than three months since February. So a main focus is on whether Draghi will hint on restarting the SMP soon and upon what conditions would ECB do so.

EU finance ministers failed to agree on toughening bank capital rules in the meeting in Brussels. Though, the result of the debate between the UK camp and Franco German Bloc suggests that they are a step closer to a deal. Danish Economy Minister Vestager said there is an agreement but "it needs technical work before it is technically done." Vestager said twenty issues were resolved and a final agreement would come at the May 15 meeting. The main question of debate was that the UK and Sweden would like to have freedom to impose tougher requirements that Basel III. That is, banks need to raise total core reserves to 7%, up from current 2%. But France and German walls all 27 EU nations to follow the same standards, something called a "maximum harmonization" of rules.

BoE Governor King said that while inflation has fallen back in recent months, it remains too high. Meanwhile, despite efforts to stimulate the economy, recovery is "proving slower than we had hoped." King noted that the "biggest risk to banks at present stems from the troubles in the euro area" and the present crisis is "far from over." The Confederation of British Industry revised down UK's growth projection down to 0.6% in 2012, down from 0.9% projection back in February. For 2013, growth is estimated to be at 2%. Nonetheless, CBI also said that there is no obvious strong case for more QE from BoE at the moment.

The New Zealand dollar dropped sharply in the Asian session today as data showed that the unemployment rate unexpectedly jumped to 6.7% in Q1 versus expectation of a fall to 6.2%. That's the highest number since 2010. There were talks that today's poor unemployment figure would provide scope for RBNZ to ease monetary policy from current 2.50%. Odds, as implied by market pricing, for rate cut by September jumped from 50% to 60% after the release. Looking ahead, other than ECB press conference, focus will also be on UK PMI services, US initial claims and ISM non-manufacturing.