The Forex Week In Review
The key focus for Forex markets this week was the bank of England September rates meeting. As expected, the Bank of England kept rates on hold at their September meeting with a broadly neutral statement which highlighted some positive developments since the August meeting. The BOE noted that evidence of the initial impact of August policy is encouraging and has led to a greater than anticipated boost to UK asset prices. Since the August meeting a number of near term activity indicators have been somewhat stronger than expected and as such the MPC now expects less of a slowing in UK GDP growth in 2H 2016.
The BOE noted that the contours of the UK economy had not changed in the wake of Brexit and there has not yet been any new information relevant for the longer term prospects of the UK economy.
Finally, the statement concluded with the BOE noting that if the November outlook is broadly consistent with August, the majority of MPC members expect a further rate cut.
Market reaction was broadly neutral with some initial upside as traders reacted to the BOE remaining on hold and their positivity around the effects of the August easing package and recent economic, however shortly after the meeting GBP traded lower against USD.
In sum, the meeting was as expected. The BOE are upbeat about recent data yet reiterate their intention and willingness to act if needed. However, with growth forecasts increased slightly and if data continues to highlight resilience then November easing will be less likely.
The key theme dominating markets this week has been the continued steepening in global yield curves leading to a correction in equities, EM and commodity currencies. Various reports over the week pertaining to next week’s BOJ meeting have seen continued steepening of long end JGB yields, spilling over into global bond yields, driving a risk off tone.
USD The US Dollar continued higher this week despite Dovish comments from Fed’s Brainard who urged caution ahead of the FOMC next week. The latest inflation data for August provided further support with the headline reading printing 1.1% against 1% expected and core printing 2.3% against 2.2% expected. This data has further increased traders’ expectations that the Fed is on track to raise rates this year and markets are expecting a Hawkish tone to next week’s meeting.
EUR Eurozone showed stalling growth in July. Industrial production fell 1.10% since June, reversing the upwardly revised 0.8% growth in the previous month. Output contracted in Germany (-1.90%), and France (-0.60%), undermined by weakness in global demand. Lautenschläger, member of the ECB’s Executive Board, stated that the central bank should not pass fresh stimulus measures and should give its earlier policy measures time to work, while she was sceptical about any further interest rate cuts given the increasing side effects of such measure.
GBP UK’s consumer prices rose 0.6% YOY in August, sustaining the quickest pace of rise in price growth since Nov 2014. Retail price index decelerated last month (1.8% vs 1.9%) but producers’ price index quickened (0.8% vs 0.3%), depicting the impact of a weaker pound sterling. Britain’s firms hired 174k more workers from May-July, slightly more than the expected 171k. The nation’s jobless rate remained at its decade low of 4.90% while claimant count rate in August was also unchanged at 2.20%. Last month, 2.4k people filed for unemployment benefits after a drop of 3.6k claims in July. Job data pointed to contained short-term risks from Brexit fallout and was largely in line with earlier release of manufacturing and services PMI showing a broad base rebound in economic activities last month.
JPY Nikkei reported that BoJ will focus its policy on lower rates as its expansion of asset buying is reaching its limit. The Bank of Japan will be likely to explore ways to clearly and narrowly define conditions allowing for the easing program to be lifted when the central bank’s board meets next week for a comprehensive assessment of its easing policy, according to Nikkei reports.
AUD Australian data released by National Australia Bank (NAB) sent mixed signals with one report pointing to moderation in business conditions in August yet another report showing that business sentiment has proven to be resilient to negative influences over recent months. Last month, business conditions index slipped (from 9 to 7) whilst business confidence index rose (from 4 to 6), the latter likely attributable to the recent 25bps cut in RBA’s cash rate, according to NAB
CAD The Canadian Dollar has been under continued pressure this week as an uptick in Fed rate hike expectations exerts downward pressure from a stronger USD. Alongside this we have seen a furtherance of the carry unwind in commodity currencies as risk appetite has diminished amidst a rise in global bond yields.