The Week That Was…
Rapidly falling commodity prices prompted another round of global monetary easing this week. Within G10, the BOC, ECB and BOE have moved toward easier stances, weighing on the respective currencies. Markets believe that more global easing is on the cards; identifying central banks most likely to act should help guide FX trading in the current environment.
Surprising markets in terms of both size and speed, the ECB committed to asset purchases to the tune of EUR60bn/month, starting in March and extending until at least September 2016. These measures should increase the ECB’s balance sheet to at least the same level as early 2012. The open-ended nature of purchases, coupled with other policy measures, adds further pressure to the already established EUR downtrend
Though the ECB will inject a large amount of liquidity in the system over the next year, markets believe that second-round effects of commodity price weakness, lower revenues, investment, employment and income will prompt the central banks of commodity producers to move toward easier stances, weighing on their respective currencies via interest rate differentials.
- USD markets continue to look for USD outperformance. The upcoming FOMC meeting is unlikely to contain any major surprises, but it will be interesting to contrast the Fed’s tone with that of central banks elsewhere, which have on the whole surprised on the doveish side in 2015.
- EUR Draghi delivered an asset purchases programme and gave all the details. This has caused EURUSD to head lower and we expect this to continue as the ECB’s balance sheet is expanded towards the €3 trillion mark. In addition, should inflation not increase towards the 2% ECB targets then the ECB will continue its purchase program
- GBP increased disinflationary pressure, with risks of now heading into deflation as highlighted by the BOE’s Carney. In addition, the two members of the BOE who were previously voting for a rate hike now want to keep rates on hold. This on top of political pressure in the coming months should keep the downward momentum on GBPUSD.
- JPY while other central banks in both G10 and EM have surprised on the doveish side recently, the BOJ remained firmly on hold at its latest meeting. While the 2015 inflation forecast was revised to 1.0%, well below the central bank’s target, the 2016 forecast was actually revised upwards.
- AUD the upcoming CPI print poses a risk for AUD, given lowflationary prints elsewhere and the recent slew of doveish surprises from central banks. While iron ore prices have stabilized somewhat, copper prices have weakened significantly since the start of the year, markets expect AUD could weaken as a result. While expectations of easing in China could offer AUD some support, market looks to sell rallies
- CAD could continue to weaken following the surprise BOC rate cut. Markets don’t see the output gap closing until 2017 at the earliest, the BOC sees it still closing at the end of 2016. Indeed, the BOC does say that if oil prices stay at these levels, the output gap is set to widen further.
- EURUSD Short Term (1-3 Days): Neutral –Medium Term (1-3 Weeks) Bearish
- GBPUSD: Short Term (1-3 Days): Neutral -Medium Term (1-3 Weeks) Bearish
- USDJPY: Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bullish
- USDCAD: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bullish
- AUDUSD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish
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