Much of investor focus last week was on the ECB policy rate decision and the subsequent communication delivered on Thursday, and the US payrolls data issued on Friday. As can be expected ahead of such events, a lot of speculation was building around the two high impact data. Here’s a quick runthrough on the highlights of these events and their effects on some of the major currencies.
For all the keen market followers out there, you will probably have found interesting that in the last ECB policy meeting (March 6) the status quo (i.e. no further easing by the ECB) translated into support for the single currency, while this time round it attracted a sell-off for the euro. Of course describing investor rationale behind that move takes much more than just this to evaluate.
In fact, it was not just a status quo that pushed the euro lower against the USD; overall Draghi sounded more dovish and flaunted the possibility of unconventional tools, as the board was unanimously in favour of it, if needed to counter any risk of deflation, he said.
However, I guess the essence here is that it seems Draghi talked down the euro’s strength. He also opted to use the words QE (quantitative easing) and within the context of central-bank-talk that brings about plenty of emotions in investor’s mind – in fact much of the effect attributed to QE is purely at a psychological level. Draghi added that the US version of QE would not fit perfectly for the EZ and it would need a different set-up.
The end effect was to see the USD gain 0.34 per cent against the euro, throughout Thursday’s session. The US dollar continued to find support even on Friday – when the US payrolls data was due.
The US economy created 192k jobs throughout the month of March, actually easing from a previous 197k (this was revised higher from 175k). While in itself the figure at least maintains its current momentum, it also came short of the expected 200k increase. US unemployment rate for the same period stood unchanged at 6.7 per cent.
However, in reality despite that, the data continued to lend support to the USD and the move was quite marginal, despite some volatility around the time of the event, mostly because the numbers were (as described by some analysts) a Goldilocks result – neither too hot and neither too cold.
Taking the broader picture, despite the euro losing its shine, the losses over the past three months have been contained at –0.61 per cent overall, while for the past year it still boasts a +6.38 per cent increase in support – according to the Bloomberg Correlation-Weighted Currency Index (BCWI). Against the USD it is still trading above 1.3700, well above the earlier estimates of 1.33 at the end of last year. The EUR/USD is currently trading back at 1.38.
Throughout the course of the past week, support has mostly favoured the JPY and the Australian dollar, respectively up +1.24 per cent and +0.83 per cent according to the BCWI.
Last Tuesday the Bank of Japan made no changes to its monetary stimulus. Governor Kuroda reiterated that the Japanese central bank will always act as needed without any hesitation. Kuroda also added that the effects of the newly introduced sales-tax increase are expected to have faded away by summer. Despite the improvement in industrial production and private investment, analysts expect the Japanese central bank to boost stimulus by July.
The JPY gathered strength after Friday’s payrolls data. The USD/JPY is currently trading just off 102 levels after opening at 103.93 early into Friday’s session. Last Tuesday we saw that the United Kingdom registered strong numbers for its industrial and manufacturing production data for February. Among a basket of major currencies the GBP was up 0.39 per cent in the former part of this week. GBP/USD rose to 1.6754 to one-month highs after the data, as speculators continue to expect the BoE to move sooner towards rate increases.
Gold remains bullish for the month of April, and at the time of writing is up by two per cent for the current month. The precious metal bounced off April 1 lows of $1,277.81 after a decline that extended from March 17 of this year, and is currently trading at $1,310 at the time of writing.
Upcoming FX key events:
Today: BoE rate decision.
Tomorrow: German CPI and US University of Michigan Consumer sentiment.
Technical key points:
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.00, key reversal point 101. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is bearish, target 0.8575, key reversal point 0.9050. AUD/USD is bullish, target 0.9450, key reversal point 0.8900. NZD/USD is bullish, target 0.8850, key reversal point 0.8400.
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Rudolf Muscat is a senior trader at RTFX Ltd.