The Forex Week In Review
Following the UK’s shock decision to leave the EU, and subsequent volatility, markets struck a calmer tone this week as risk assets staged a recovery amidst growing expectations of further global easing.
In comments made during a speech this week BOE Governor Mark Carney opined that a rate cut “over the summer” was needed to address the economic damage caused by the UK’s Brexit vote. This view falls in line with the majority of industry economists who are now expecting the bank to ease further.
BOJ board member Masai reiterated comments made by various BOJ officials recently in a warning against excess volatility in currency markets. The Japanese Yen softened over the week as safe-haven demand weakened in the face of a broad risk based recovery.
The ECB noted ahead of the UK referendum that they stood ready to cushion the market with liquidity in the event of Brexit but as yet they seem to be adopting a “wait and see” approach. ECB President Mario Draghi told EU leaders this week that the Brexit decision might reduce EZ growth by 0.3 – 0.5% over the next three years and urged central banks to align on monetary policy and avoid “lose-lose” devaluations and investor uncertainty.
USD retreated from recent highs as safe haven demand weakened in the face of a recovery in risk assets. On the data front, we saw better-than-expected Consumer Confidence alongside a consensus print in Core PCE in May. US rate hike expectations have been dialled back in the wake of the UK’s Brexit decision, in line with the Fed’s earlier warnings over the likely impact to the US and global economy from such a move.
EUR European Central Bank President Mario Draghi said in a closed-door session that growth in the euro area could decline by as much as 0.5% point for the next three years cumulatively. EU government chiefs took the historic step of meeting without one of the bloc’s members for the first time, they lamented the British decision to part ways then began to lay plans for a new union without the UK. That included setting the parameters of Britain’s future relationship with the EU, and insisting that negotiations to finalize secession won’t be started until the UK gives official notification of departure. On the data front EZ CPI was better-than-expected in June rising on both Core and headline readings.
GBP BOE governor Mark Carney signalled that the central bank could announce additional stimulus measures in the upcoming policy meetings as early as July. “Over the horizon, there’s Financial Policy Committee decisions next week, there are two monetary policy committee meetings this summer, July and August, and I would look at those as a bit of a package, as meetings”. Traders are expecting BOE to cut rate after the comments and if this were to happen in July, it is definitely much sooner than we had expected. Two top ratings agencies have downgraded the Britain’s sovereign credit score, judging last week’s vote to leave the European Union. S&P dropped the grade from AAA to AA and warned more downgrades could follow
JPY The Japanese Yen pulled back from recent highs this week as a recovery in risk assets saw diminished safe haven demand for the currency. JPY strength remains a concern for Japanese officials, with the BOJ saying it would respond to extremely volatile exchange-rate moves, signalling a readiness to intervene to stem the JPY strength. Japanese Retail Trade and Retail Sales prints painted the picture of subdued domestic demand in May. On the ata front Retail trade tumbled 1.9% YOY in May, extending the 0.9% YOY decline in April while Retail Sales were flattish from April to May after falling 0.1% in the previous month. Despite huge stimulus package, the government is still confronted with the challenge of reviving domestic demand amid an ageing population. CPI fell for a third straight month in May falling 0.4%, putting further pressure on the BOJ to counter the failing economy.
AUD The Australian Dollar remained buoyant over the week supported by the recovery in risk appetite. Data from Australia’s largest trading partner, China, kept sentiment intact with manufacturing PMI data printing in line with expectations in June. Alongside the support from data we saw Iron ore maintaining its upward momentum, with steel prices in China driving the sector.
CAD Traders cut bullish bets on the loonie for the third straight week, according to the Commodity Futures Trading Commission statistics showed on last Friday. Net long Canadian dollar positions tumbled to 2,595 contracts in the week ended June 21 from 18,440 contracts in prior week. Despite the reduction in long positions, CAD improved over the week benefiting from moves high in Oil prices.