This week, focus shifted on Central Bank decisions mainly the Bank of Japan, Federal Reserve and Swiss National Bank. Although no changes were expected in interest rates, the spotlight was turned on the accompanying statements from the Central Banks and to any new hints of more easing.
Risk was buoyed by recent signs of improvement in the US economy- Emman Xuereb
The previous week was dominated by Greek bailout talks, the European Central Bank meeting and the US jobs report. On Friday, the forex market went on a see-saw ride. Initially last Friday, risk appetite was buoyed by reports that a deal for Greece’s second bailout was done and by expectations for yet another strong non-farm payrolls number.
However, Greece announced its intention to activate Collective Action Clauses and ISDA formally declared a credit event, which put pressure again on the euro. A better-than-expected jobs report from the United States ignited a surge in the US dollar across the board. The US non-farm payroll figure stood at 227k versus market consensus for 210k.
EUR/USD plummeted almost two big figures on Friday, from 1.3278 to a low of 1.3097 and looked like it would extend its decline further at the start of this week, as forex investors re-entered short positions.
USD/JPY hit a fresh 10-month high on Friday, confirming its bullish trend and pushed higher to 82.85 by Tuesday of this week. USD/CHF also surged higher, as it rose to a three-week high on Friday to 0.9205 and extended its rise to 0.9239 on Tuesday, a four-week peak.
On Tuesday morning, the Bank of Japan announced no change to its current interest rates keeping them at ultra low levels of 0-0.1 per cent. The BOJ also kept its JGB-purchase targets unchanged, despite some speculation that the Central Bank may again raise its current levels of quantitative easing. This speculation was prompted after a decision took longer to be announced than usual, which alerted investors to the possibility that policymakers may surprise markets yet again and ease policy further.
The yen bounced back after the announcement. USD/JPY fell to a session low at 81.97, while EUR/JPY dropped from 108.66 to 107.88 as many forex investors were ready to bet on a repeat of the central bank’s actions last month.
Risk appetite improved on Tuesday, pushing Asian shares to a one-week high and lifting higher-yielding currencies. Risk was buoyed by recent signs of improvement in the US economy. EUR/USD recovered to 1.3191 earlier, AUD/USD was up more than a quarter per cent to 1.0561 and NZD/USD rose more than 0.60 per cent to 0.8236. The mood was also lifted after euro zone finance ministers approved the second round of Greece’s financial aid on Monday. The deal worth €130 billion will ensure Greece meets its debt obligations starting from this month. This comes after Greece successfully concluded a debt-swap deal with private bondholders which will wipe off more than €100 billion from its books.
Higher-yielding currencies did not manage to hang on to their gains however on Tuesday, as there was further evidence of a fundamental change in trends. At the start of the week, and from last Friday, it was becoming increasingly clear that the psychology around the US dollar was changing. The greenback no longer is supported only in the presence of risk aversion and now stronger US economic data is also pushing it higher. This change may pave the way for further dollar gains over the coming months as market expectations for further Fed easing recede, as US economic data improve.
On Tuesday, a stronger advance retail sales number from the US, which rose to a five month high of 1.1 per cent, drove the buck higher across the board as the series of positive US figures reduces the likelihood of QE3, which will encourage USD-bulls to re-enter the stage. EUR/USD fell to almost a one-month low at 1.3052 ahead of the FOMC announcement on Tuesday, and USD/JPY was up to 82.85.
Finally, today the SNB will hold its quarterly Monetary Policy Assessment.
Although no change is expected to their three-month Libor target, currently set at zero, and neither to the current lower boundary set on EUR/CHF at 1.2000. But investors will be keen to gather any hints on future policy moves regarding this floor on EUR/CHF.
Upcoming FX key events:
Today: Swiss SNB interest rate decision, US PPI & US Philly Fed business index.
Tomorrow: US CPI & US Preliminary Michigan confidence.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 7800.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.