The Week That Was…
The key focus for Forex markets this week was the ECB’s December meeting. Investor expectations heading into the ECB’s December were decisively Dovish expecting the ECB to cut its deposit rate and also increase and extend its quantitative easing program. These expectations were so strong in fact that the Euro was down nearly 1000 pips from the October meeting at which the ECB first aired its considerations of such moves. Draghi has a reputation of “over-delivering” in terms of policy adjustments and players were clearly banking on the EU chief doing the same again yesterday, anticipating that the Euro would be sent sharply lower. However, this was not to be the case.
The ECB did indeed cut its deposit rate today, in line with the expected 10bps reduction and it did also announce that QE would be extended, now set to run into March 2017 at the least, however there is no current expansion of QE. Although the range of assets approved for purchase has been increased the actual pace of QE, currently at 60bn Euros a month, will not be increased at this stage. These moves were a shock to market participants considering QE expansion a near certainty and EUR reacted sharply higher in response to the news as players took profit on EUR shorts held heading into the meeting as the very crowded EUR short trade has now seen a decent clear out.
Attention then turned to the US November NFPs which printed 211k vs 200k expected with the unemployment rate remaining unchanged at 5% . Markets now await the December 16th FOMC meeting with CME group pricing a 79% probability of a hike.
- USD The US Dollar was sharply lower this week as initial strength was abandoned in the wake of the markets swift reaction to the ECB’s further measures announced on Thursday. Losses were stemmed on Friday however as the November NFP’s came in just above expectations with the Unemployment rate remaining at 5%.
- EUR The single currency was seen sharply higher in response to the ECB’s apparently disappointing course of action. The ECB cut rates in line with the expected 10bps reduction and although QE was extended (now set to run until at least March 2017) the stimulus program was not increased at this stage. Players who had been heavily short the Euro into the event, took profits on positions seeing a large spike in EUR.
- GBP Recent data flow for Sterling has been mixed; Net Consumer Credit, Manufacturing & Construction PMI data all missed before Services PMI data came in above expectations to stem losses on the week. Traders now await the BOE next week, with the BOE expected to continue their recent Dovish tone.
- JPY Despite slightly weaker Manufacturing PMI data the Japanese Yen was boosted by an impressive Q3 Capex release, growing at the fastest pace in July-September YoY for over 8 years, which suggests a possible upward revision to the recent weak Q3 GDP print.
- AUD The recent bullish momentum behind the Aussie continued again this week. The RBA held rates unchanged as expected and were optimistic in their economic outlook, noting the strong growth in jobs and overall economic resilience in the face of global headwinds. Governor Stevens’ optimism was tempered by the caveat that there remains scope for further easing if necessary, but currently momentum favours further upside in the Aussie.
- CAD The BOC kept rates on hold as expected in its December monetary policy meeting, however the accompanying statement struck a less Dovish tone than previous output, lending the Canadian Dollar some support mid week. Oil flows however kept CAD constrained ahead of Friday’s OPEC meeting, with the organization meeting to consider policies to combat the oversupply in the Oil market and stabilize prices.