80% of Bloomberg economists surveyed ahead of the ECB meeting see the PEPP programme remaining unchanged. This is in keeping with recent rhetoric out of the ECB with ECB’s Schnabel saying that premature removal of ECB support would be a ‘great mistake’. So, anticipation heading into the ECB rate meeting is for an ‘on hold’ meeting.

In contrast, the NZD has seen some strength since the shift from the RBNZ at their last rate meeting. At the last RBNZ rate meeting, the asset purchases (LSAP programme) were unchanged, the interest rate kept at 0.25%, but the key signal was a forward rate forecast pointing to a 25bps rate hike in September 2022. This decision was a surprise and a hawkish tilt to the NZD. The RBNZ is also slowing bond purchases next week by NZ$100m which is the first reduction since April. This should keep the bond yield spread pressed between German Bunds and New Zealand 10 year yields.

Therefore, there is a near selling bias from market into the ECB rate meeting on Thursday, June 10.

Key Trade Risks:

• The main risk to this trade is from any unexpected COVID news impacting either New Zealand or the eurozone.
• A rise in the German Bund and NZ10 year bond yield spread ahead of Thursday.