The Forex Week In Review
This week was notably quieter in Forex markets as the September central bank cycle has concluded. With the tier one data sheet fairly light focus was instead turned to European banking concerns and the OPEC meeting.
Risk markets came under pressure over the week as concerns for Germany’s Deutsche Bank continued to drive uncertainty. Deutsche bank shares, down over 50% on the year, continue to be hammered amidst concerns that that they will not be able to meet proposed fines 0f $14bln form US regulators for the mis-selling of mortgage backed securities. Price recovered slightly mid week on reports that German officials are preparing plans for an emergency rescue deal if needed. However, prices took a fresh turn lower on Friday as Hedge Funds slashed their exposure to the bank. As a fresh European banking crisis looms investors have been moving capital into safe haven assets over the week with the Japanese Yen strengthening accordingly.
OPEC surprised markets midweek as an informal meeting was announced to have heralded an agreement to cut production, marking the first deal of this type since 2008. Details are to be confirmed at the November meeting but the provisional agreement contains plans to limit production to a range of 32.5 to 33 million barrels a day. Oil prices rallied strongly in response to the news, providing some support for risk assets. However, over the week, the rally fizzled out as doubts began to creep in given the history of tension amongst OPEC member countries and their history of deception around production numbers. Traders now await further details at the November meeting though prices are likely to remain volatile in the interim on any news from member states and reports on the health of the agreement.
USD consensus suggests Candidate Clinton got the better of the first of the three debates and risk sentiment has stabilised overnight. Continuous downbeat US headline data added to the retreat in risk yesterday. New home sales fell 7.6% MOM in August, pulling back from the 9-year high level in July while Dallas Fed showed manufacturing activities remained mired in negative territory although the pace of contraction was notably smaller. USD fell against 90% of G10FX amid dismal US data that continued to impose a soft outlook on the Fed’s policy normalisation path.
EUR EuroZone Core CPI was lower than expected in September printing 0.8% vs 0.9% expected whilst the headline reading printed in line at 0.4%. Earlier in the week saw the release of the September German IFO index, which rose sharply to 109.5 from a revised 106.3, originally reported as 106.2. The consensus was for a more modest advance to 106.5 for the month and the sharp recovery from last month’s notably weak reading will help improve confidence after a run of generally disappointing German data.
GBP BoE Deputy Governor Minouche Shafik said that more easing will probably be needed after the “sizeable economic shock” of the Brexit vote. Bank of England Governor Mark Carney said that BoE has looked to provide support to the economy to help with adjustment, both in terms of improving ability of banks to lend and improving cost of borrowing. According to British Banker’s Association, the number of home loans fell to 37k in August (July: 37.7k), posting signs that Brexit fallout may reflect on economic data sooner than anticipated after the initial shock. Services and manufacturing PMI suggested that some part of the economy rebounded sharply last month after the initial jolt from Britain’s vote to leave EU in July. That provided some reprieve and eased concerns of a drastic deceleration in growth due to Brexit in the short term.
JPY Bank of Japan policymakers fretted over weak inflation expectations and uncertain prospects for achieving its price goal even before announcing its plan to conduct in September a comprehensive review of its policies, according to minutes of the central bank’s policy meeting released this week. Data showed that the Japanese retail industry remains in the doldrums, painting a picture of subdued household consumption in August. Retail sales dropped 2.1% from a year ago, marking its sixth straight contraction.
AUD The Australian Dollar has been benefiting from a wave of risk on trade in reaction to the US presidential debate. Still, with the outcome of the presidential race many weeks away and with the more pressing issue of extended monetary policy a major concern, there is the possibility the rally runs into resistance rather quickly.
CAD The Bank of Canada was more inclined to ease monetary policy than tighten it was revived after figures showed Canada’s annual inflation rate in August dipped to a 10-month low and retail sales unexpectedly fell in July. The Canadian Dollar was boosted midweek on Oil strength in response to the OPEC meeting. On the data front CPI for July came in stronger than expected at 1.3% vs 1.% expected.