The FX Week In Review

The Week That Was…

The main focus of forex markets this week was the European Central Bank rate decision and policy statement. In the wake of growing global volatility, continued downward inflationary pressure and a recently stronger euro, market chatter began increasingly to mention the possibility of further measures being introduced. The ECB ultimately surpassed dovish expectations by increasing their asset purchase program through increasing the amount of issuance the ECB can purchase from 25% to 33%, alongside this action the ECB also lowered it’s growth and inflation forecasts citing increased global risks to their economic outlook and reiterating their willingness to do whatever necessary to support the attainment of their inflation targets ,stating that QE can be continued past the September 2016 end point if needed.

Attention then turned to the US August Jobs report. Expected to arrive at 220k markets were taken aback by another disappointing print with a figure of 170k. However, the unemployment rate declined from 5.3% to 5.1% and average hourly earnings increased. Players were looking at this data point at being perhaps the last key gauge of whether the Fed will raise rates in September and the very mixed reaction of the US dollar after the number summarised the continued uncertainty perfectly.

The risk-off theme of recent weeks continued this week as equity and commodity markets traded lower on further data weakness out of China.

Overview

• USD: Ultimately driven higher this week by the effects of the ECB’s QE increase. Positioning ahead of Friday’s jobs report also saw USD better bid and although the jobs report saw a big miss arriving at 170k vs 220k expected, USD seemed well supported as investors seemed undeterred by the miss.
• EUR: The announcement of an increase in the ECB’s asset purchase program and willingness to step in against continued EUR strength saw price decline sharply against a continued backdrop of carry trade unwinding.
• GBP: Sterling traded lower this week as weak August PMI figures softened trader’s expectations of a UK rate hike and saw further retracement of bullish positions. BOE next week is now main focus though expectations have softened given recent data disappointment. GBP/USD has fallen through the 50% retracement of 2015 lows to highs and next key support is at 1.5086, the 61.8% retracement and May low.
• JPY: Safe haven flow has continued to support the Japanese yen amidst increasing global slow down fears. Domestic data flow has had little impact against the broader issue of the timing of a Fed lift off date and Chinese data concerns. Comments made by BOJ’s Kiucki that the BOJ will be unable to meet it’s inflation target and should taper it’s asset purchases seemed largely ignored by markets.
• AUD: Another heavy week for the Australian dollar which broke fresh 2015 lows having recently broken down through the 15-year ascending trend line. Australian Q2 GDP came in below market expectations at 0.2% q/q. and retail sales also fell below expectations printing the first lower figure in 14 months. The RBA maintained rates this month and stuck to a data-dependent policy stance.
• CAD: The Canadian currency was weaker again despite the stronger-than-expected Canadian Q2 GDP data, the core drivers of risk sentiment and oil prices continued to keep USD/CAD hemmed in with the Canadian unemployment rate increasing adding further concern for the state of the Canadian economy.