The Forex Week In Review
The key focus for Forex markets this week was the heavily anticipated March ECB meeting which certainly dind’t fail in providing fireworks. Expectations ahead of the meeting were clearly skewed towards further easing being announced with anlayst consensus built around a 10bps deposit rate cut and some adjustment to the QE program. In a clear effort to take a firm shot at the deflation threatening the EuroZone economy the ECB eased across all fronts.
New measures announced included a 10bps cut in the deposit rate, a 5bps cut in the refinancing rate and a 5bps cut in the margincal lending facility rate alongside adjustments to QE which include increasing the size of pucthases to 80 billion Euros per month, an increase of over 30%, as well as increasing the range of assets available to pucrhase. Assets available for purchase as part of QE will now include non-bank corporate bonds.
Also announced was a series of four Targeted Long-Term Refinancing Operations to be launched in June, each with a maturity of four years. The TLTRO’s are an especially interesting step and highlight the determination of the ECB. The payments will effectively act as a subsidy for Banks taking up the money , balancing out negative deposit rates. For those banks whose net lending surapsses a benchmark, the rate of the TLTRO could be as low as the deposit rate.
What followed was a violent period of volatility as initial EUR weakness was sharply reversed during the press conference following the decision as markets reacted negatively to comments from Draghi saying that he didn’t anticipate further rate cuts in coming meetings. Citi reported a huge 500mio EUR in demand as EURUSD ripped higher off the 1.08 lows to close the day nearly 400 pips higher. Subsquently it seems that sentiment has shifted with European equities rallying to erase yesterday’s losses and EUR falling sharply.
USD – In the absence of key US data USD was driven mainly by EUR flows in the wake of the ECB meeting, falling sharply as the EUR rallied post-decision. Attention now turns firmly to next week’s FOMC meeting. CME group is pricing 0% chance of a rate-hike though traders will be kee to scrutinise the accompanying statement and press-conference for clues as to the likely rate-path over the remainder of the year.
EUR – ECB President Darghi must have been fiercely disappointed to suffer the same fate as he did in December as the Euro rallied following the ECB meeting. However, the new measures announced suggest that the ECB is moving away from attempts to weaken the Euro in an effor to fuel external demand and increased import prices and instead is focusing on improving EuroZone credit conditions looking fuel a domestic recovery through supporting the banks and credit-growth.
GBP – Brexit concerns took a back-seat this week as Sterling was driven higher by a significantly weakened USD and subsequently from firmer risk-sentiment in the wake of the ECB meeting as equities finally turned higher. Upside was capped on Friday as the latest Trade Balance data showed a widening of the deficit.
JPY – Better risk sentiment saw JPY in less demand this week as equities eventually broke higher in response to the ECB meeting. Further Bank of Japan’s easing should be a combination of lower negative rates and increased asset purchases, according to comments from Etsuro Honda, an adviser to Japanese Prime Minister Shinzo Abe.
AUD – The Australian Dollar continued to forge higher ground this week supported by a broadly risk-on appetite. Chinese CPI mid-week was better than expected and kep positive sentiment intact. The RBNZ unexpectedly cut rates which leant further support to the Aussie as AUDNZD was driven sharply higher.
CAD – Crude Oil managed to break above the key $38 resistance level as optimism for a proposed OPEC production freeze continues to keep price supported as Short positions are squared. This move supported the Canadian Dollar over the week which also benefitted from the BOC deciding to keep rates unchanged alongside a surpisngly upbeat policy statement. In contrast, Canadian employment data on Friday was weaker than expected with the Unemployment rate increasing to 7.3% from 7.2%.