CURRENCY: As with yesterday's trading the downside of the NZD will remain limited in the current environment. Comments from ECB President last night should preclude markets retesting EUR lows to close out this week.

RATES: The local market is likely to pare back rate cut expectations a touch given Draghi's potentially reassuring comments. Back end yields are also likely to open a tad higher given the 5bp sell-off in AU 3yr bond futures.

REVIEW

CURRENCY: Overnight the NZD led the way higher. Offshore markets flowed along the lines of yield demand initially but the NZD moved to warp speed after ECB President Draghi's comments.

GLOBAL MARKETS: Peripheral bond yields contracted sharply on Draghi's comments, with Italian and Spanish 10yr yields down 38 and 45bps respectively. Core bond yields rose, but not by much - US 10yr Treasury yields are just 5bps above all-time lows. Equity markets rebounded strongly - the Euro Stoxx closed up 4.2% while the Dow was up 1.6% at 7.00am.

KEY THEMES AND VIEWS

DRAGHI CHANGES HIS TUNE. So few words, such a big reaction. Today's main event was ECB President Mario Draghi's contribution to a conference hosted by UK Trade and Investment, where he stated that "the ECB is ready to do whatever it takes to preserve the euro ? believe me, it will be enough." With reference to rising sovereign bond yields in Spain and Italy, Draghi added that "to the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate." To many in the market, this was a clear signal that the ECB are committed to capping the rise in Spanish and Italian bond yields by buying bonds, most obviously via a reactivation of the Securities Market Program (sterilized support, and the easiest channel to use) or through quantitative easing (unsterilized, and arguably the most powerful option due to its theoretically unlimited firepower). This is in line with this week's urging for action by OECD Secretary-General, Angel Gurria. What it is completely out of line with is comments he made in mid-May about being pure to the ECB's price stability mandate, and "preserving the integrity" of the ECB's balance sheet. Predictably, your humble author wonders when it will all end. Buying bonds will certainly stem the rot in yields in the short term, but unless it is part of a wider long term plan for stability that includes stricter rules and adherence, central oversight and austerity, it's like putting out a fire with gasoline. Still, the market clearly liked it. But while we did see a snap lower in peripheral yields as the market raced to cover shorts, the question we need to ask here is, will this stem diversification flows into Australia and NZ? We doubt it - this is not the beginning of the end, it's just the start, and we fully expect investors to remain wary on Europe, and to continue buying NZ bonds. In fact, the more peripheral bonds the ECB buys, there more cash gets freed up to potentially buy NZGS. We all now wait with bated breath for the talk to be followed by action. Next week's troika of ECB, BOE and Fed meetings is shaping up to be the must see event of the year.

OTHER EVENTS AND QUOTES

� The IMF's Lagarde warned of the uncertainty surrounding the US fiscal cliff, and said it was a major risk to the world economy.

NZD/USD: I believe?

That continued support for the NZD is likely to be demonstrated in today's trading session. This should see any dips closer to 0.7980 well supported as markets look to close the week quietly.

Expected range: 0.7980 - 0.8050

NZD/AUD: A little relief?

Having precluded the possibility of a cut at yesterday's RBNZ OCR Review markets were happy for the NZD to lead the way higher. Support at 0.7650 was unbroken as increased portfolio hedging took precedence. Further topside moves should be limited today.

Expected range: 0.7690 - 0.7730

NZD/EUR: Whatever it takes?

An extremely brave comment from ECB President Draghi overnight led to a rebound in the EUR/USD. Short positions were squeezed out but the NZD led the way buoyed by yield and should continue to be supported today.

Expected range: 0.6505 - 0.6545

NZD/JPY: Yield reigns?

The push through resistance at 61.90 was an easy one for this cross as yield demand and lowered risk concerns dominated overnight trading. Today extensions past 63JPY will be hard to sustain.

Expected range: 62.25 - 63.05

NZD/GBP: Sitting on the fence?

Despite a move above 0.51GBP on this cross it still remains vulnerable to Olympic euphoria in the coming days. Limited topside in today's trading.

Expected range: 0.5090 - 0.5120