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January 2016

Weekly Currency Insight

Published: Monday 25 January 2016

  • ECB hints at further easing
  • UK GDP data this Thursday
  • Euro on the back foot
Last week the Euro fell sharply after Mario Draghi hinted at further easing from the European Central Bank perhaps as early as the next meeting in March. He used the press conference after this month's meeting to state that the global outlook had deteriorated over the last couple of months and that a slowing China was a threat to the European economy. He also noted that the ECB had plenty of firepower left and that they would reassess and reconsider further quantitative easing at the next meeting. The Euro lost significant ground against the Pound and this looks set to continue until we get further confirmation.
 
The highlight this week will be the Federal Reserve meeting in the United States on Wednesday. It is unlikely that there will be any change to policy at this stage however it will be interesting to hear their thoughts on the falling oil price and the general slowdown in emerging markets. US data has been mostly positive of late so they may well remind markets that they are still expecting to raise rates 3 or 4 times in 2016. Currently the market is not pricing this in so a more hawkish FOMC will certainly see the dollar strengthen.


AUD


The Pound remains in a downtrend against the Australian Dollar which has been in play since August of last year. There are no signs of this trend breaking at present. The markets appear to have stabilised a touch after a pretty horrendous beginning to the year. AUD traders will be focused on the FED’s decision on Wednesday. The Australian Dollar strengthened against the Pound on the Fed’s hike last month despite being largely priced in already. Further hints at more hikes from the US are expected to see the Australian Dollar continue its momentum versus the Pound. Those looking to buy Australian Dollars will hope that the FED are more Hawkish which may renew risk aversion and deteriorate the Australian Dollar.  At present it looks like the Pound will test psychological support at 2.00.



 


EUR


Sterling Euro spent the most part of the week in a free fall after dovish comments from BOE Governor Carney exacerbated the move lower. Mark Carney signalled an increase in interest rate is still sometime away as he highlighted global economic risks and persistent factors weighing on inflation. This pushed the Sterling Euro rate back below 1.30 close to the levels that were last observed before the ECBs announcement of QE.
These low levels proved only to be temporary; as ECB President Mario Draghi delivered a more-forceful-than-expected indication that the bank had plenty of instruments at its disposal to push inflation higher as the ECB is willing to act in order to fulfil its mandate. The ECB emphasised that the ECB has no limits to using tools and instruments as Draghi cited falling oil prices and slowing emerging markets which warranted a review in March. As a result Sterling Euro corrected from the 12 month lows breaking the dominant downtrend.



 

CAD
 

Last week saw a substantial move for the Canadian Dollar as they kept its key interest rate on hold at 0.5%. The BoC said that risks to inflation remained roughly balanced, despite a renewed decline in oil prices and sluggish economic growth. They went on to say that they expect inflation to climb to 2% by early 2017, while core inflation would remain around 2%. While declines in oil and other commodities have not helped, they attributed the slowdown in the first quarter of 2015, due to the temporary softness of the US economy at the time. The BoC now expects the economy's return to above-potential growth to be delayed until the second quarter of 2016. The central bank projects that the nation's economy will grow by about 1.5% in 2016 and 2.5% in 2017.
 
Following the decision to keep rates on hold last week, the Canadian rallied 3% against the Pound, moving from the 2.08 region down to just above 2.02. Since then, continued concern with oil and the general outlook of the economy, has seen the Canadian lose some of the gains seen last Wednesday. Unless oil sees a major turnaround, we would expect to see the GBPCAD pair trickle back towards resistance levels in the 2.07-2.08 region.   
 




NZD


After the 30% rally in GBPNZD between April and August 2015 (from 1.93 to 2.50), the rate has corrected over 50% of that move back down finding some buyers at 2.15 in late December. Since the August, high prices are in what looks to be a sustainable downtrend. There’s resistance currently at 2.25 (top of the downtrend) and support at 2.1480. Whilst the Kiwi’s been gaining against the pound it’s not all rosy in New Zealand. Inflation was very disappointing in December falling to -0.5% and such a drop in prices would leave the Reserve Bank of New Zealand (RBNZ) with room for an interest rate cut to boost growth. They’ve been grappling with an already over-heated housing market but further rate cuts would only add fuel to the fire. Unfortunately for the RBNZ policy makers, they’ve got a job on their hands trying to stimulate a lagging economy without bursting the property bubble. At this week’s RBNZ meeting analysts are not expecting another interest rate cut straight after the cut in December but the accompanying monetary policy statement is likely to be pretty downbeat. Falling dairy prices and subdued inflation leaves the door open for more interest rate cuts if need be. If that’s the case, the Kiwi will sell off giving GBPNZD clients a good buying opportunity. Speak to your consultant about putting a target order in place to take advantage of an upswing in GBPNZD. 



USD


Sterling recovered slightly after resting very close to the psychologically important 1.400 level last week. Sterling has been falling on the back of the divergent monetary policy stances of the Bank of England and the Federal Reserve. The Federal Reserve have already raised interest rates once and are expected to do so 3 or 4 times this year while traders have been paring back expectations for rate hikes in the UK to the end of the year at the earliest. This week brings UK GDP data on Thursday and perhaps more importantly another meeting of policy makers in the United States. Both of these events are crucial to the near term direction of the Pound versus the Dollar and as such will offer opportunities for buyers and sellers. Expect significant volatility into the end of the month.


 

EUR/USD


 The Euro was on the back foot towards the end of last week after negative rhetoric from European Central bank chief Mario Draghi. The ECB left interest rates on hold; however Mr Draghi stated that they were watching the oil price and events in China very closely and that they remain poised to act if necessary. Markets which had been disappointed with a perceived lack of action by the ECB in the December meeting have been buoyed by the news. Although it is fair to say that having been disappointed in the past, they are known to wait for concrete action before taking large positions. The single currency is still trading within recent ranges (1.07 – 1.10). The focus this week will be in the United States as the Federal Reserve meets on Wednesday. A hawkish bias is expected which may see the Euro continue lower.
 



 

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