The Forex Week In Review
Traders’ main focus this week was on the European Central Bank’s September meeting which passed largely as expected with the bank opting to keep policy on hold at this point in time. The ECB noted that the recovery is expected to be dampened by subdued foreign demand, risk to growth outlook tilted to downside and downgraded their 2017 and 2018 growth forecasts whilst revising higher their 2016 growth forecast. The updated ECB staff projections now see 2016 growth at 1.7% vs prior 1.6%, 2017 at 1.6% vs prior 1.7% and 2018 at 1.6% vs prior 1.7%.
The Euro flip flopped in reaction to the release, initially spiking higher as the rate decision came in unchanged and later deriving further support as Draghi revealed during the press conference that the ECB hadn’t discussed extending QE. Eventually gains were conceded however as Draghi reiterated the ECB’s famous line that they stand ready and willing to act further if needed.
- USD The US Dollar traded lower over the week after the August ISM Non-Manufacturing reading came in well below expectations at 51.4 vs 54.9. The data came as a disappoint to US bulls who were encouraged by recent comments from Fed chair Yellen who noted that she felt recent data has been supportive of a rate hike this year.
- EUR ECB left its key interest rates unchanged. Main refinancing rate, deposit rate and marginal lending rate held at 0.0%, – 0.4% and 0.25% respectively. The central bank also refrained from expanding its stimulus program, contrary to expectation that bond purchase may be extended beyond its current due date of March 2017. Growth forecast for this year was revised up to 1.7% (previous: 1.6%) but forecast for 2017 and 2018 was revised down to 1.6% (previous: 1.7%). No change to inflation forecast for 2016 and 2018, at 0.2% and 1.6% respectively, while inflation outlook for 2017 was revised down to 1.2% (previous: 1.3%)
- GBP UK’s industrial production grew a meagre 0.1% MOM July (June: flat growth), underpinned by the slowest production in the manufacturing sector in a year but was alleviated by the jump in oil and gas output. Factories production fell 0.9% from June to July, extending the 0.2% MOM decline in June. Output rose 2.1% from a year ago, with manufacturing gaining 0.8%. Separately, house prices grew 6.9% YOY in the three months through August, its slowest pace since 2013. That followed price increase of 8.40% YOY in the three months through July.
- JPY Japan’s coincident and leading index ticked up for two straight months in July, signalling that businesses were more optimistic about the economy. Coincident index climbed to 112.8 (June: 112.1) whilst leading index rose to 100.0 in July (June: 99.2). On a separate report, final reading of 2Q GDP showed that the Japan expanded 0.2% QOOQ last quarter, quicker than a previous estimate of no growth largely due to upward revision in private demand.
- AUD RBA held interest rates unchanged at 1.5% as expected in yesterday’s meeting following two cuts in four months to spur sluggish inflation. The accompanying statement suggests that the central bank has more rooms for easing should economic conditions deteriorate or if further appreciation of the Australian dollar hinders exports and growth. Market shrugged off other economic data. Current account deficits rose from AUD 14.9 billion in the first quarter to. The Australian economy expanded 0.5% QOQ in 2Q which was half the pace of growth in the previous quarter. Steeper decline in capital investment (-0.7% vs -0.2%) coupled with slower pace of goods/services exports growth (+0.3% vs +0.7%) were dragging the headline number and strengthened the case for RBA’s preference of a weaker exchange rate to alleviate downside risks. While the economy grew 3.3% on an annual basis, the quickest pace since June 2012, risks remain tilted on the downside as indicated by disappointing indicators from the manufacturing, services and construction industries in August.
- CAD The Bank of Canada (BoC) maintained its target for the overnight rate at 0.5%, as was widely expected. In the accompanying statement, the Bank noted that whilst global growth in 1H16 was slower than projected in its July Monetary Policy Report, the Bank continues to expect it to strengthen gradually over the remainder of this year with global financial conditions having become even more accommodative since July.