Just two weeks into the New Year and Forex markets have already seen some huge moves. Despite the absence of key data releases this week we have seen the continuation of some major trends with the Canadian Dollar and British Pound both suffering further sharp losses.
The investor uncertainty stemming from the “Brexit” issue, alongside unwinding UK rate-hike expectations, poor economic data and risk-off related selling have all combined to weigh on GBP which broke new five year lows this week. The Bank Of England kept rates unchanged as expected and delivered an equally expected Dovish verdict on the current environment stating that inflation is likely to be lower than first thought due to the continued Oil price declines, with GDP forecast to have grown slower than expected in Q4 2015 and Q1 2016. The BOE also noted disappointingly low productivity and wage and credit growth.
The continued decline in Oil prices, as the supply glut deepens further still, have put significant pressure on the Canadian Dollar and with Oil making its way below $30 per barrel, the anticipated damage to the Canadian economy is fuelling expectations of further rate-cuts by the Bank Of Canada as early as next week.
The Forex Week In Review
- USD The US Dollar extended gains this week, following on from an impressive December NFP print. In the absence of much key data, main focus was on a raft of Fed communication with several members speaking throughout the week. Fed’s Evans. Despite more Dovish output from Fed’s Lockhart & Evans who commented that concerns around inflation and the economy mean that the Fed should follow an “even shallower path” than currently projected, with only two – three rate hikes this year rather than four, Fed’s Kaplan & Lacker were more optimistic, dismissing the likely impact of Chinese volatility on US fundamentals and endorsing the proposed our further rate increases projected for 2016. On Friday soft Retail Sales were countered by a better than expected U. of Michigan Confidence number.
- EUR The continued risk-averse tone with which early 2016 is unfolding continues to support the single currency which, through its inverse correlation with risk, is seeing decent demand as equity markets extend losses amidst deepening global growth concerns. The ECB December Meeting minutes release showed that the decision to enact further easing was a close call. Some members were more optimistic about the health of the EuroZone economy, believing that further easing would have negative effects, whilst some members actually wanted to initiate further easing. The release illuminated the deep rift within the ECB, dampening expectations of further easing in the months to come.
- GBP Sterling was driven sharply lower this week as the latest Industrial and Manufacturing data both printed far below expectations, compounding the heavy investor sentiment on GBP currently as UK rate-hike expectations continue to unwind. The Bank Of England noted on Thursday that inflation is likely to be lower than first thought due to the continued declines in Oil prices with GDP forecast to also have grown slower than expected in Q4 2015 and Q1 2016. The BOE also noted disappointingly low productivity, wage and credit growth alongside the damage that “Brexit” concerns are wreaking on Sterling.
- JPY Despite some better than expected Chinese trade figures mid week, risk sentiment has remained dampened this week as more rounds of selling inn Chinese equities have translated into global equity market losses. The Bank of Japan governor Kuroda said that Japanese inflation is improving in a steady manner due to a strengthening domestic labour market. He also underlined that the current easing monetary policy will succeed in the near future though the BOJ is only halfway to its two percent inflation target. Traders will be keeping a close eye on any continued strength in the Japanese Yen as it will likely see BOJ commentary take a more Dovish turn.
- AUD The Australian Dollar continued lower this week in line with further Oil price declines and general risk-off sentiment. Australian Unemployment, which is improving reliably, declined further to 5.2% this week, but despite this encouraging domestic development, concerns for China and global-growth continue to keep the Aussie under pressure.
- CAD The Canadian Dollar dropped to a fresh 12-year low against USD this week, pressured by the continuing fall in crude oil prices and evidence that Canadian business sentiment deteriorated. The combination of negative factors may add pressure on the Bank of Canada to take further action after they cut interest rates twice in 2015. The Bank of Canada’s quarterly Business Outlook Survey reported that the negative effects of lower oil and commodity prices caused business sentiment to deteriorate over the last three months.