The Forex Week In Review
An action packed week comes to an end in Forex markets, marking the last significant data week of the Summer.
Attention first of all turned to the Bank of England who met for their August “Super Thursday” meeting. Expectations were running extremely high ahead of the August BOE meeting with traders anticipating that the BOE were going to follow through on earlier signals and deliver easing measures. However, opinions were split regarding which measures the BOE were likely to use with some looking for a basic rate cut whilst others forecast ores expansive measures including QE.
To the surprise of many, the BOE eased across a range of channels in August. The headline cash rate at 0.5% was cut to .25%,, 6 of the 9 MPC members voted in favour expanding QE, which will now run at £60bln over the next 6 months, whilst 8 of the 9 voted to launch a corporate bond buying program, which will run at £10bln for the next 18 months and finally all members voted in favour of a term funding program. Alongside these measures, the BOE noted that the majority of MPC members expected to vote for a further cut in the future though Carney noted that he “is not a fan of negative interest rates” and the lower bound for rates is “close to, a little above” zero.
The BOE noted that their economic outlook “has weakened markedly” following Brexit and growth forecasts have been revised lower in 2017 from 2.3% to 0.8% and also in 2018 from 2.3% to 1.8% with business investment and housing investment also expected to fall over the period. Inflation is expected to pickup due to the weaker pound, forecast to be at 2.1% in 2017 and 2.1$ in 2018 with measures intended to ensure that inflation won’t fall below target in the medium term.
Carney referred to the stimulus measures as “exceptional” and says that by acting early the BOE can reduce uncertainty and bolster confidence.
Focus then shifted to the US July Employment reports with the headline NFP figure forecast to print 180k vs 287k in June. Expectations were comfortably surpassed with the NFP reading 225k in July which ,alongside the Unemployment rate remaining steady at 4.9% and Average Hourly Earnings similarly at 2.6%, saw the US Dollar sharply bid into the London close on Friday.
USD Having been heavily sold on the back of a non-committal FOMC meeting and dismal 2Q growth readings, the US Dollar was able to recover some ground as traders rushed to buy the currency in response to the latest employment report. Following June’s bumper print, the July NFPs similarly beat expectations printing 225k vs 180k expected. In its recent meeting the Fed cited diminished near term economic risks and a strengthening labour market. With the latest labour market data showing clear positive momentum traders are now beginning to reprice September and December rate hike chances.
EUR ECB’s latest macroeconomic projections for the euro area showed that the economy is expected to grow 1.6% in 2016 (previous: 1.4%) and 1.7% in 2017 and 2018. HICP inflation is expected to remain very low in 2016, at 0.2% (previous: 0.1%), strongly dampened by the past fall in energy prices. For 2017, a significant increase in headline inflation to 1.3% is anticipated while declining economic slacks may push up inflation somewhat further to 1.6% in 2018
GBP BoE slashed rates by 25bps to a record low of 0.25% in a unanimous vote while asset purchase targets were raised by £60bn to £435bn with a 6-3 vote. BOE also decided to purchase corporate bonds of up to £10bn at yesterday’s meeting. BOE Governor Carney signaled intention to further cut rates to near zero this year but discounted the case for negative rates at this juncture. While this year’s growth forecast is maintained at 2.0%, next year growth forecast was severely downgraded to just 0.8%, from a previous estimate of 2.3%.
JPY BoJ Deputy Governor Kikuo Iwata suggested the central bank had no plans to reduce the amount of assets it buys or change the composition of assets in purchases in a way that would tighten monetary policy. Japan’s foreign reserves fell to $1.26 trillion at the end of July and the Japanese government did not conduct any intervention between 29 June and 27 July, according to the Ministry of Finance said today
AUD The Reserve Bank of Australia cut rates to record lows this week amidst an environment of persistent low inflation. Despite the move, AUD remained bid as Australian rates still look attractive compared to other nations. Ten-year domestic debt yields are at 1.83% compared to 1.53% in the United States and -6 basis points in both Germany and Japan. The Aussie’s resilience has in turn led the market to price in a 50-50 chance of yet another cut by November. RBA Statement on Monetary Policy showed that inflation is not forecast to return to the banks 2%-3% target range until end 2018.
CAD The Canadian Dollar was weighed on initially this week by continued pressure in Oil markets which remain weighed by supply-demand imbalance concerns. Data on Friday added further pressure as, although the Unemployment rate remained unchanged at 6.8% in July, the Net Change in Employment was significantly below expectations at -31k vs 10k expected. July services employment can be volatile due to swings in the education sector.