The Week That Was…
Forex markets this week saw tricky conditions ahead of an anticipated rate rise by the US Federal Reserve next week. The US Dollar which started the week on a positive note following on from last week’s November NFP beat was sharply sold mid week as comments from ECB’s Nowotny suggested that further ECB easing is not a surety and indeed, more members are moving into the hawkish camp. These comments struck at the very heart of the EURUSD policy divergence trade, which focuses on ECB easing and Fed tightening, seeing EUR in demand once again.
The other key event of the week was the Bank of England’s December meeting which passed as expected with rates remaining unchanged and voting retaining an 8-1 split with BOE’s McCafferty still the only hawk as yet convinced that the BOE should lift interest rates. The key issues challenging the Bank’s desire to raise rates are the continued downward inflationary pressure stemming from yet more downside in Oil prices and a possibly concomitant slowdown in wage growth, which is a key factor in the Bank’s rate setting decision process.
We have also seen interesting moves elsewhere with the New Zealand Dollar jumping counter-intuitively following yet a further rate reduction by the RBNZ, with the New Zealand cash rate now standing at 2.5%. The move left many traders stumped but is simply a function of the constant game of expectation and reaction shaping FX markets. Although the RBNZ did infact cut rates, the accompanying statement was far more Hawkish than markets expect with the Bank stating that they see inflation moving back into their target range within the first quarter of 2016 and this negating the need for further easing.
The last major story of the week is the continued slide in Oil prices which have now plumbed new 2015 lows. OPEC’s failure last week to agree on terms to address the oversupply in Oil markets has seen heavy selling pressuring commodity markets and equity markets alike.
- USD The US Dollar remains soft ahead of next week’s FOMC meeting. An adjustment to the EURUSD policy divergence picture fuelled further USD selling midweek with the Dollar index back below its July highs. Full focus now turns to the upcoming rate decision with CME pricing an 83% probability of lift-off. USD ended the week lower as retail sales on Friday came in below expectations at 0.2% vs o.3% expected.
- EUR The single currency, which was sharply stronger last week following as markets reacted with disappointment to the ECB’s latest policy adjustment, extended gains this week following comments by ECB’s Nowotny which suggested that further ECB easing is not a sure thing, causing a further unwinding of EUR shorts.
- GBP Sterling was sharply higher this week as investors paired downside risk ahead of the Bank of England’s December meeting, expecting that the Bank might soften its recent Dovishness. Upside was fuelled also by an improved NIESR GDP estimate which beat came in above expectations of 0.5% at 0.6%. The BOE however retained their recent Dovishness, noting the subdued inflation outlook stemming from continued Oil price declines, seeing GBP lower except against the embattled commodity currencies.
- JPY The Japanese Yen was higher this week supported by safe-haven inflows. The tumbling Chinese Yuan, continued slide in Oil prices, and weaker equity markets alongside a softer Dollar have all contributed to higher demand for the Japanese Yen which is supported also by a reversal in easing expectations as investor no longer anticipate further BOJ easing this year.
- AUD Aside from a mid-week rebound as the US Dollar was sold, the Aussie has been sharply lower this week as commodity currencies were hit amidst a risk off tone. Even a further decline in the Australian unemployment rate, which beat expectations of 6% to print 5.8%, was unable to stem the losses as price tracked Oil lower across the week
- CAD The Canadian Dollar, which is weighed upon by divergent policies between the Bank of Canada and the US Federal Reserve, was a further victim of the continued Oil price declines this week. The near-term domestic economic outlook combined with continued Energy weakness have left the Canadian Dollar one of the worst performing currencies of the year, fuelling expectations of a further BOC rate cut to come.