The Forex Week in Review
Markets this week were focused on the September BOJ Monetary Policy Meeting and the September FOMC decision.
Markets had become increasingly expectant of further BOJ easing in line with recent comments made by BOJ officials stating that they couldn’t rule out a move into deeper negative rates. Japanese newspapers also reported sources close to the BOJ as noting that the bank were likely to further cut rates.
However, the bank refrained further easing and instead introduced new policy framework; QQE with yield curve control, which reduced the duration of the bank’s JGB purchase program. The Bank also tweaked their ETF purchases, they now intend to purchase Y2.7trln of ETFs linked to TOPIX out of their total Y6trln ETF purchase program.
Despite initial heavy selling in JPY, markets once again showed their disappointment with the BOJ and JPY reversed to trade higher on the week.
Attention then turned to the FOMC meeting. Whilst broad market expectations were aligned to an unchanged decision, some analysts and media pundits were advocating the likelihood of a “surprise hike”. However, in line with expectations the Fed opted to keep rates on hold at this juncture, despite 3 members voting in favour of a hike.
The Fed cited their reason for remaining on hold as allowing them to wait for evidence of further progress being made towards their goals. They noted that job gains have been solid in recent months but unemployment rate is little changed whilst Business fixed investment remains soft.
USD The September FOMC meeting received a very mixed response from markets. Whilst the Fed opted to keep rates on hold, the tone of the statement was decidedly Hawkish with the Fed noting that they see a rate rise as being appropriate before the year end if economic data remains on track. Indeed, three members voted for a hike at this juncture shifting the voting skew to 7-3 in favour of no change. Despite Hawkishness the Dollar was sold in response to the Fed lowering their dot plot forecasts for the year ahead which now sees just one rise in 2016 and two in 2017 down from three previously.
EUR The ECB economic bulletin revealed that the governing council remains ready to act if necessary in order to achieve the bank’s price stability target. ECB remains less sanguine in its assessment of the risks to global economy, and noted prevailing macroeconomic uncertainty triggered by the Brexit vote, but acknowledged that volatility deriving from the vote was short-lived. Advanced estimates showed that consumer sentiment in the Eurozone improved in Sept, pushing the index higher to -8.2 from -8.5 previously.
GBP Sterling rebounded from a five-week low against the USD on Thursday after a Bank of England policymaker said she saw no case for a further cut in interest rates to boost the economy following Britain’s vote to leave the European Union. Sterling was also strengthened late on Wednesday by weakness in the dollar after the US Federal Reserve kept monetary policy steady and projected a less aggressive path for rate hikes in coming years.
JPY At their September MPM the BOJ refrained from easing policy further but did introduce new policy framework. QQE with yield curve control is intended to steepen Japanese yield curves and highlights a shift in the bank’s focus away from increasing QE. and Japan’s top currency diplomat said that Japanese financial authorities are watching for speculative currency market moves and would respond if needed and they are worried that there are nervous moves in the currency market. Japan’s finance ministry, Financial Services Agency and the Bank of Japan will meet on today’s afternoon to discuss market issues in the wake of policy decisions from the BoJ and the US central bank, the agencies said.
AUD RBA has hinted at a stable outlook for interest rates having already cut twice this year, revealed by the RBA minutes released yesterday. The RBA left interest rates unchanged at 1.5 percent earlier this month, said the economy was growing at potential despite further falls in business investment. Financial markets imply around a one-in-three chance of another easing by year end, perhaps in November after the release of inflation figures for the third quarter.
CAD The Canadian Dollar strengthened over the week deriving support from strength in Oil markets and USD weakness which came on the back of the September FOMC meeting which saw the US Dollar sold in response to the Fed lowering their dot plot. Canadian CPI in August was lower than expected at 1.1% vs 1.4% on the headline reading and 1.8% vs 2% on the Core reading.