The Forex Week In Review

The Forex Week In Review

The key focus for currency markets this week was the October ECB meeting. The meeting passed largely as expected with the central bank keeping rates on hold and announcing no extension of QE. However, EUR was heavily sold in response to the meeting and subsequent press conference as Draghi gave a firm signal that the bank will announce its next policy adjustment in December.

Further Dovish signals came as the ECB noted that they expect rates to stay at present or lower levels for an extended period and that the monthly QE purchases will continue until March 2017 or longer if necessary.  The ECB also noted that whilst recent data has pointed to growth in the EuroZone, the baseline scenario remains subject to downside risks.  Expectations for further easing have now jumped, weighing heavily on the Euro and sending the Dollar higher.

Overview

USD The US Dollar traded higher over the week supported by a strengthening of Democratic candidate Hilary Clinton’s lead in the US Presidential election polls. Despite a slight miss on September CPI the Greenback continued to trade higher further supported by a sharp weakening of the Euro in response to ECB easing signals.

EUR EUR ECB maintained its policy stance as widely expected. Main refinancing rate, deposit rate and lending rate were held at 0.00%, -0.40% and 0.25% respectively. Asset purchase target also stayed pat at €80 billion per month. President Mario Draghi signalled that bond tapering may occur before the QE program stops, indicating that an extension to the maturity of the stimulus program is on the table. On the data front, current account surplus rose to €29.7 billion in August (July: revised to €27.7 billion).

GBP UK unemployment rate was 4.90% in the three months through August, hovering around its decade low rate since May. Companies added 106k employees to payrolls in the same time period which was much lower than the 174k increase in July. Despite the low unemployment rate, rapid price growth dampened real wage gains, potentially undermining household spending with Brexit fallout. On a positive note, the number of jobless claims fell to 0.7k in September from 7.1k in August. UK retail sales grew at a slower pace of 4.10% YOY in September after a climb of 6.60% YOY in August. The headline print was dragged by slower sales in food stores and petrol stations and compounded by steeper drop in textile, clothing & footwear sales.

JPY Construction output in the EuroZone dropped 0.90% MOM in August, reversing the revised 1.50% MOM growth in July. Separately, Japan’s all industry activity index grew 0.20% MOM in August, unchanged from the pace in July. The modest reading showed that growth remained sluggish in 3Q. Japan’s Nationwide department sales dropped 5.00% YOY in September and extended the streak of negative growth since March this year. Adding to signs of weak domestic demand, machine tool orders tumbled 6.30% YOY in September (August: -8.40% YOY).

AUD Australia’s unemployment rate ticked down 0.1% to 5.60% in September after a revision to August reading. The headline print improved despite the 9.8k drop in number of jobs filled amid lower labor force participation rate (September: 64.50% vs August: 64.70%). On a separate report, business confidence index climbed to 5 in 3Q (2Q: 3), rising to the highest level in the past three quarters.

CAD The Bank of Canada held rate son hold at their October meeting however, growth forecasts were revised lower as the bank noted downside risks. CAD was sold sharply in response to the meeting which noted that BOC members had “actively discussed” easing at the meeting but opted to wait. This development has further boosted markets’ BOC easing expectations. Canadian CPI on Friday came in lower than expected putting further pressure on CAD into the end of the week.