FX Week In Review: Risk Sentiment Recovers

The trends which have dominated the first month of 2016 were this week reversed somewhat in forex markets as risk sentiment managed to recover, supported by the comments of central bankers and the growing expectations of further action. Indeed the PBOC acted mid-week to inject extra capital into the country’s Banks, which helped calm markets. A rebound in oil price this week added further support to the recovery in risk-sentiment, with crude making its way back above the $30 mark having hit the low $27’s earlier in the week.

The main focus of the week was the January ECB meeting. The meeting saw rates remain unchanged, as expected, though the press conference following the decision saw ECB president Mario Draghi delivering a message that was more Dovish than many expected. Draghi noted that inflation is still well below the ECB’s target and that the expected 2016 inflation path is now significantly lower than projected in December due to continued declines in oil prices. Downside risks to both inflation and growth were cited, with the slowdown in emerging markets listed as prominent among the contributing factors.

Draghi confirmed that the ECB will review its policy stance at their March meeting, stating that the Bank’s credibility would be harmed otherwise, and reiterated also the ECB’s willingness to act, saying that there were “no limits” to how far they are willing to go in employing their resources to achieve their mandate. This commitment to policy review in March has seen increasing expectations of further easing by the ECB driving a recovery in equity markets into the weekend.

The Forex Week In Review

• USD Despite softer than expected December CPI data the US dollar advanced again this week as the policy divergence present between the US and other G10 economies was further endorsed this week as the ECB paved the way for further easing in March and investor expectations grow for further easing also from the BOJ.
• EUR The single currency was ultimately driven lower on the week as a recovery in risk-appetite stemming from the ECB’s January meeting saw a rebound in equity markets. The ECB noted that continued oil price declines were weighing heavily on the inflation outlook, which is now though to be significantly lower over 2016 than projected in December, and cited also the continuing downside risks to inflation and growth stemming from the slowdown in emerging markets. The ECB have committed to reviewing its monetary policy stance in march and have prompted a heightening of easing expectations among investors.
• GBP Sterling was able to avoid printing a sixth consecutive negative week as a rebound in risk-sentiment towards the end of the week prompted some short covering in the beleaguered British pound, with an unexpected drop in in Public Sector Net Borrowing adding support for the move. The latest labour conditions data continued its recent theme, showing a further decline in the Unemployment rate but also a decline in average weekly earnings. The disappointing reversal in wage-growth momentum alongside growing uncertainty surrounding the issue of a “Brexit” still weighs on GBP despite this correction.
• JPY The Japanese yen was driven lower this week in part by a recovery in global risk-sentiment and also by mounting expectations of further BOJ stimulus to be announced next week. A Japanese Govt official commented mid-week that the Japanese Govt were closely watching currency moves which was taken as a clear sign by investors that the recent strength in JPY will force the BOJ’s hand.
• AUD The Australian dollar reversed some its recent losses this week as a rebound in risk-sentiment and commodity prices spurred some short-covering in the Aussie. Intervention by the PBOC and the promise by Chinese Vice President Li that China would continue efforts to stabilise equity markets helped calm investor nerves and stem the volatility that marred the first half of the week.
• CAD The Canadian dollar staged a much needed recovery this week as a support stemming from a solid rebound in oil prices was strengthened by the Bank Of Canada’s decision to keep rates on hold. The BOC were largely expected to cut at their January meeting and the decision to hold, alongside a rather neutral statement, took many by surprise spurring profit-taking on some CAD short positions. The latest CPI data on Friday showed that domestic inflation was seen rising at the fastest pace for more than a year in December.

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Written By: Littlefish FX