The Forex Week In Review
Forex markets this week were treated to a double dose of central bank action with both the Fed and the BOJ meeting for their July rate setting meetings. In the wake of Brexit, easing expectations have been running at fever with traders expecting that central banks would step in to ease the economic damage caused by Brexit which in the case of the Fed has seen a reduction in rate hike expectations.
The Fed left rates unchanged at 0.50% as expected but left the door ajar for a rate hike this year, citing diminished near term risks to the US economy. The Fed has also turned more upbeat about growth assessment although officials remained cautious on the consequences of rate hike as inflation remains below the Fed’s 2% target. While the Fed acknowledge that recent dataflow from the US has turned more encouraging, they prefer to err on the safe side pending more concrete signs of sustainable recovery in growth and prices. In all the meeting was taken as a mild USD positive with traders now split between a September or December rates move.
Following the FOMC action we had the BOJ who disappointed market expectations with a lacklustre policy approach. Perhaps market expectations had been unduly raised ahead of the meeting on the back of the Reuters story that the MOF had prepared a press statement to coincide with BOJ easing. Some of the USDJPY decline has been cushioned by the news of an expansion in ETF purchases, doubling the size of its USD lending program to USD 24bn and setting up a new facility to lend JGBs. However, this is not what the market was looking for with the QQE program and monetary base unchanged at Yen 80 tln and the policy rate holding steady at -0.10% and traders reacted with an aggressive JPY rally. Indications are that opposition is growing within the BOJ leading to a costly and ineffective policy.
Global equity markets ended strongly recovering losses suffered at the end of June in the wake of Brexit with the MSCI US Equity Index up 3.49% on the month marking its best month since March. Oil prices remain under pressure however as global supply fears once again flood the narrative as an increasing amount of banks and analysts downgrade their demand forecasts for the rest of the year.
USD Despite a mildly positive tone to the July FOMC statement which saw the Fed citing diminished near term economic risks, USD weakened as the Fed stopped short of giving markets a timing signal for rate hike instead reiterating that they feel only very gradual increases in the fed funds rate will be appropriate and that the rate is likely to stay at low levels for a long time. Data put further pressure on USD as durable goods orders extended their declines and pending home sales rose less than forecasted in June. Durable goods orders tumbled 4.0% MOM in June amid a sharp decline in capital goods orders and showed lacklustre investment that will remain a drag on 2Q growth with US manufacturing and jobless claims also taking a turn for the worse. On Friday both Personal Consumption and GDP printed below expectations.
EUR A slew of confidence indicators staged surprised upticks in July, signalling immediate impact from Brexit may be more contained although longer run downside risks remain valid. Economic confidence index was up 0.2 point to 104.6 this month while business climate indicator edged 0.17 point higher to 0.39. July EuroZone CPI Estimates came in stronger than expected on both headline and core readings at 0.2% vs 0.1% and 0.9% vs 0.8% respectively whilst EuroZone Q2 GDP also beat expectations to print 1.6% vs 1.5%. This positive data further reduces the likelihood of near term ECB easing.
GBP The UK economy grew more than expected before Brexit but may mark a directional turn from stable growth as the vote last month delivered an immediate blow to business and consumer sentiment. The country expanded 0.6% QoQ in 2Q which was quicker than the 0.40% QoQ pace in 1Q as industrial production registered its biggest increase since 1999. UK’s average house prices climbed 5.2% YOY to £ 205.7k in July (June: +5.1% YOY) according to Nationwide Building society but momentum in Britain’s property market may slow after Brexit. Despite low mortgage rates and housing supply shortages, a turn in homebuyer’s sentiment weighed down by Brexit could soften demand for homes in the near term.
JPY BOJ severely disappointed highly expectant markets with their lacklustre policy adjustment in July which saw rates kept on hold at -0.1% and monetary base left unchanged at Y80trln. An increase in ETF purchases from Y3.3trln to Y6trln did little to reassure markets and saw JPY rallying in response. Japan’s Prime Minister Shinzo Abe said that the government will roll out stimulus package worth 28 trillion yen ($ 265.3 billion) which include 13 trillion yen in “fiscal stimulus” comprises of spending by national and local governments as well as loan programs.
AUD Consumer prices rose at the slowest annual pace since 1999 last quarter while core inflation kept at a record low of 1.5%, well under the Reserve Bank of Australia’s (RBA) target band of 2 to 3% and thus keeping pressure on the RBA ahead of their meeting next week with traders expecting that the low inflation could prompt the central bank to cut interest rates once more.
CAD The Canadian Dollar was pressured over the week as growing over-supply concerns pushed Oil prices down to a new 3 month low.An increasing amount of banks and analysts are slashing their Oil forecasts for the year in line with expectations for diminished demand. Domestic GDP data on Friday printed 1% YoY vs expectations of 1.2% putting further pressure on the currency