The Forex Week In Review
Market focus this week was on the ECB who met for their July rates meeting. In line with expectations, ECB opted to maintain policy at current levels with the council concluding that they didn’t yet have the information to make decisions. Draghi noted that the ECB judged that they needed more time to assess the state of market-based inflation expectations though the bank stood ready to act, using all the instruments in its mandate, if warranted. Referring specifically to Brexit, Draghi noted that initial impact estimates should be treated cautiously and Brexit didn’t seem to have major impact on the inflation outlook.
Regarding inflation, Draghi noted that levels are likely to remain very low in the next few months but should pick up in 2017-18. The growth outlook was said to have risks tilted to the downside, largely due to Brexit, though data point to ongoing growth in Q2 albeit it at perhaps a slower pace than Q1.
Discussing some of the other issues facing the EuroZone Draghi noted that it was weak bank profitability, not solvency, that was the problem but that NPLs were indeed a problem that need to be addressed, with a high level of NPLs making banks especially vulnerable to the markets. The banking sector was judged to have reacted in “fairly resilient” fashion to Brexit and policy measures since 2014 have significantly improved borrowing conditions. Draghi also said it was essential that the bank lending channel continues to function well and that implementation of structural reforms need to be stepped up. Regarding the bank’s QE program, Draghi noted that the council judged TLTRO as quite successful.
In terms of broader threats to the EuroZone Draghi noted that it was very difficult to understand how geopolitical uncertainties affect the EuroZone but that recent events in Turkey could undermine confidence. Given these uncertainties Draghi said that it was important for a message of stability to come out of the G20.
USD A quiet data week saw muted USD flows though USD gained over the week amidst the broadly risk-off tone with commodities under pressure. Recent data keeps the US rate-path mildly supported with the possibility of a rate hike still looming. Focus now shifts to next week’s FOMC meeting with traders keenly waiting clues in the Fed’s language as to the likely rate-path over the month’s ahead
EUR The ECB kept rate son hold as expected but were less forthcoming regarding the likelihood of further easing than some players were anticipating. The ECN downplayed Brexit risks and although downside risks were noted, growth and inflation were both forecast to pick up I the medium term.
GBP GBP In May, UK unemployment rate fell below 5.0% for the first time since 2005. Jobless rate dropped to 4.9% before Brexit as 176k jobs were added to the labour market in the three months through May. Average Weekly Earnings over the period remained steady at 2.2% whilst CPI in June printed above expectations at 0.5% vs 0.4% on the headline reading and 1.4% vs 1.3% on Core. PMI data on Friday confirmed economic fears with all three data sets printing below 50 for the July period marking the fastest economic contraction since 2009.
JPY The International Monetary Fund downplayed the need for Japan to weaken its currency to boost economic growth and inflation, saying the yen’s moves have been orderly and that government intervention isn’t advised. In comments made on radio this week BOJ Governor Kuroda ruled out the prospect of “helicopter money” saying there was both no need and no possibility. Traders now await the BOJ meeting next week to learn the details of the stimulus package ordered by PM Abe.
AUD The RBA July meeting minutes left room for easing in the central bank’s next meeting in August. Staff will provide update on inflation, labour market and housing market activity outlook in the Statement of Monetary Policy, allowing the Board to “make any adjustment to the stance of policy that may be appropriate”. With inflation expected to remain quite low for some time and Australian dollar stronger than preferred level, RBA may ease again next month to spur growth. Focus now shifts to the Q2 inflation reading next week.
CAD The Canadian Dollar was under pressure this week weighed upon by the decline in Oil prices which were hit by a resurgence of oversupply fears. The US Energy Department registered a ninth straight week of drawdown in crude stocks though inventories remain near record levels. Canadian CPI on Friday printed above expectations.