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Daily Market Analysis FX Focused on Policy

by Stephen Casey | September 8, 2016

Good morning. It’s another quiet morning to start North American trade on Thursday. Earlier today, the European Central Bank announced its main and deposit rates would remain unchanged at its latest policy meeting, with a muted reaction thus far. ECB Chairman Mario Draghi will be speaking to reporters momentarily and we could get some volatility should Mr. Draghi hint at any further easing measures by Europe’s policymakers. The US dollar remains under heavy selling pressure as oil and other risky assets continue to trend higher. Four central bank meetings yielded no results this week and global investors continue to flood into equities as the only source of real return. On Wednesday, the Bank of Canada left policy unchanged and offered some cautious optimism on the local economy for the duration of 2016 – more analysis below.

The Japanese yen has likely been this week’s biggest winner with data overnight not stemming its rise. Key growth figures for the second quarter missed the mark, with final readings showing an annual pace of 0.7% versus expectations of 0.8%. This data miss was not enough to stem the currency’s rise even as BoJ Deputy Governor Nakaso was speaking overnight, specifically on the committee’s comprehensive assessment of its policy effects which will conclude in about two weeks. The Bank of Japan’s Deputy Governor added that the central bank will continue to explore negative rates, which impacted bank stocks negatively. The Australian dollar was higher again, led by oil and undeterred by some comments from the RBA’s Lowe, who claimed further supervision of the global financial markets is as important as new regulations. Turning to Europe, Mr. Draghi is just about to take to the podium in Frankfurt and expand on his committee’s decision to keep rates unchanged today. The euro has had a very good week, up about 1% since last week’s close, taking advantage of the dollar’s broad weakness. Investors will be keenly interested in any comments concerning additional stimulus, negative rates or specifics on how the committee is monitoring the ongoing Brexit fallout. Some recent UK economic data points have shown the local economy has bounced back hard in August, giving Sterling a boost. Whether or not that strength peters into mainland Europe is an important topic of discussion across foreign exchange markets. German and UK trade balance figures loses out the week across the pond.

As previously reported, the Bank of Canada concluded their latest policy meeting on Wednesday and kept the main rate unchanged at 0.50%. The loonie’s immediate reaction was lower, as the central bank warned “household imbalances” continue to rise – despite a more optimistic outlook for the remainder of 2016. The central bank forecasts a “substantial rebound” in economic growth in late 2016 after a very sharp drop in recent activity, driven by a sharp decline in exports and the Alberta wildfires. Also interesting to note is the committee’s lingering concerns over the housing markets in Vancouver and Toronto. House prices have increased by 31% and 17% respectively in those cities over the same period in 2015 and policymakers could act later this year to combat these growing bubbles. In its July monetary policy report, the BOC forecast economic growth to rebound in Q3 to 3.5% before slowing down to a 2.8% pace for the final three months of the year.

It is a rather quiet US slate with weekly jobless claims to be reported at 830am. The market is anticipating another strong number with only 265k Americans filing first-time unemployment claims for the week ending September 2nd. The big dollar began the week on a new losing streak following last week’s non-farm payrolls report. Despite an uneven session on Friday, investors around the world have pushed dollar bulls to the brink, notably against the commodity bloc, which have all experienced some solid gains this week. Yesterday’s Beige Book release went largely unnoticed by the markets without much surprise. The Fed’s summary of current economic conditions doesn’t appear to warrant any hikes this month, and the market is clearly not expecting much, with odds resting at 18% for a 25 bps increase. Well-known Fed hawks Lacker and George were on the wires as well yesterday with Mr. Lacker noting there is a “strong case” for a rate hike this month. The greenback was unchanged on his comments. July wholesale inventories close out the US data calendar tomorrow.

Have a great Thursday.

 

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