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ECB Steps Into Uncharted Territory, US Gains 217,000 Jobs

This is a summary for the forex trading week ending Friday, June 6th 2014. The ECB decision we talked about in my previous weekly summary didn’t disappoint. The European Central Bank instituted negative deposit interest rates, the first major central bank to do so. On Friday, the important US Jobs report came in largely in line with the median market forecast for a gain of 214,000 jobs. But let’s start from the beginning.

German CPI prints in the red

The Preliminary figures for the German CPI printed at negative 0.1 percent. Market estimates were centered around a gain of 0.1 percent. The negative European inflation picture got confirmed on Tuesday when the Euro wide CPI (year on year) rose by only 0.5 percent, way below the ECB’s 2% target. 1) The market was expected a growth figure of 0.7 percent. The Core CPI numbers also came in lower, at 0.7% versus expected 0.9%.Both the German and Euro wide inflation figures would play a role in the ECB move later in the week.

European PMIs came in mixed last week. The Spanish Manufacturing PMI for the month of May printed at 52.9. Analysts were gunning for a 52.7 figure. Italy’s Manufacturing PMI came in at 53.2, 54.3 was anticipated by forecasters. Numbers above 50 indicate industry expansion. The total Manufacturing PMI for the Eurozone printed at 52.2, slightly lower from last month’s 52.5 figure.

The Services PMIs for the continent largely came within the forecasters bounds. The Spanish Services PMI printed at 55.7 versus a 56.1 estimate. The Italian figures showed a slight gain from last month’s 51.1 to 51.4. For the Zone, the Services PMIs dipped, a number of 53.5 was anticipated but data came in at 53.2. The news above hardly made a dent in the Euro. The EUR/USD spent the first three days of the week ranging between a low of 1.3586 and a high of 1.3647. The market was clearly waiting for the important ECB decision on Thursday.

ECB Goes Below Zero, QE May Follow

The European Central Bank cut the main interest rate from 0.25% to 0.15%. But more importantly, the deposit rate was cut 10 basis points to – 0.10%, bringing it into the negative territory for the first time. 2) The ECB is the first major central bank to give negative deposit rates a try. The move is aimed at spurring lending. The thinking goes that if the ECB penalizes keeping money in its vaults by charging interest, banks would withdraw those funds and maybe later invest them in new loans. Success is far from guaranteed however, as previous experiments by the Danish Central Bank show. 3)

The Euro fell 40 pips on the historic rate cut. Draghi’s press conference 45 minutes after the rate decision would push Europe’s single currency even lower. The ECB President announced a new LTRO: ‘’ in order to support bank lending to households and non-financial corporations, excluding loans to households for house purchase, we will be conducting a series of targeted longer-term refinancing operations (TLTROs). All TLTROs will mature in September 2018, i.e. in around 4 years.’’ In addition to this, the Central Bank will stop sterilizing the purchases made under the Securities Markets Program. The SMP was introduced as an emergency measure to support the bonds of peripheral countries. Just to get an idea of the scale of the bond buying, as of 18 June 2012, the ECB in total spent a whooping €212.1bn (equal to 2.2% of the Eurozone GDP) for bond purchases covering outright debt, as part of its SMP running since May 2010. It is unclear how big of an impact the non-sterilization of the SMP will have going forward however. With the European Debt Crisis in remission, the Bank has probably stopped buying peripheral bonds a long time ago.

Draghi’s Comments Give Hope to Euro Bulls

Some of the President’s comments during the press gave hope to the Euro bulls. Draghi basically excluded the possibility of interest rates going lower by saying that ‘’rates are now at their lower bound’’. The Euro quickly reversed the fall on this and other positive comments by the ECB President, after reaching a low of 1.3504 during the first part of the press. The subsequent rally saw EUR prices recover all the losses from earlier in the day. The EUR/USD miraculously closed Thursday in the green by a sizeable 60 pips! Here is a chart showing the Euro V shaped trading session on Thursday.

US Economy Adds 217,000 Jobs

Aside from the Jobs Reports, it has been a largely unimportant week for US news. On Monday, the ISM Manufacturing PMI came in just a bit below the 55.7 forecast at 55.4. This is a slight move up from last month’s 54.9 figure. On the other hand, the ISM Non-Manufacturing surprised to the upside. Analysts were gunning for a 55.6 number, we got 56.3. The ADP failed to predict the NFP yet again. The ADP Non-Farm Employment Change came in at +179,000, missing both the forecast and Friday’s NFP by about 35,000 jobs. The weekly Unemployment Claims published on Thursday were not a market mover. The data came in at 312,000, slightly above the 309,000 estimate.

The big ticket item was Friday’s Non-Farm Payrolls. The data showed that the US economy created 217,000 jobs in the month of May, barely beating the 214,000 analyst estimate. The previous month’s figures were revised slightly lower from +288,000 to +282,000. The unemployment rate stayed at 6.3 percent.

The immediate market reaction to the news was to sell the US Dollar. The Euro gained from 1.3632 to 1.3676. Two hours later however, the mood changed and the common currency reversed course, hitting a daily low of 1.3621. The volatile session ended with the EUR/USD closing the week at 1.3644, 15 pips down for the day but 9 pips up for the week.

BOE Stands Pat

The Pound closed 40 pips higher against the US Dollar last week. The UK currency didn’t experience the same amount of volatility as their neighbours across the channel. The Bank of England meeting held on Thursday was much less dramatic. The BOE chose to keep the interest rate at 0.5%. The level of Assets Purchases was also held constant at 375 Billion Pounds.

The GBP/USD barely had any reaction to the non-news. The pair moved in a 15 pip range but after 15 minutes it was back to its pre-release price of 1.6756. The ECB rate cut 45 minutes later pushed Sterling down and later in the day we hit a low of 1.6726 during the Draghi press conference. But similarly to the situation he had with the Euro, the fall was later reversed and by the end of the day Cable was looking at 1.6817, 80 pips in the green.

Cable doesn’t budge on smaller news earlier in the week

The smaller news items earlier in the week didn’t make much of market impact. On Monday, UK’s Manufacturing PMI came in line with estimates. Net Lending to Individuals figures however came in lower at +2.4 Billion Pounds versus a market forecast for +2.7 Billion Pounds.

On Tuesday, Nationwide’s House Price Index showed that prices across the UK rose by 0.7 percent last month. Construction however, proved weaker. The Construction PMI for the month of April printed at 60, below the 61.2 forecast and also below last month’s 60.8. UK’s Trade Balance continues to print in the red. The latest data showed that the country had a deficit of 9.6 Billion Pounds in April, beating the March – 8.3 Billion.

Slow news week for Japan

Last week was a slow news week for the quirky island nation. Capital spending for the first quarter of 2014 showed a surprising gain of 7.4 percent. Analysts were betting on a smaller 5.4% rise. 4) On Monday, the Monetary Base fell from 48.5% to 45.6%. The fall was the third decline in the Base in a row. The Japanese monetary base has been in a downward trajectory since March of this year. The Average Cash Earnings, also released on Monday, rose by 0.9 percent, beating the 0.6 percent analyst estimate.

That’s pretty much it in terms of news reports for Japan last week. On the technical front, the Yen was one of the worst performers during the last 5 trading days. The Japanese currency lost 61 pips against the US Dollar, 90 pips against the Euro and 82 against the Australian Dollar.

Swiss inflation ticks up

The Swiss Franc gained 14 pips against the Euro last week. The majority of the gains came on the back of the ECB decision on Thursday and, as was the case with the rest of the majors, the gains were reversed on Friday. In Swiss specific news, the inflation ticked up to 0.3 percent (month on month figures), slightly above the 0.2 percent median estimate. 5) The Foreign Currency Reserves held by the SNB increased by 6 Billion to 444.4 Billion Swiss Francs. The CPI news did jolt the EUR/CHF into action, taking prices lower from 1.2172 to 1.2166 but the small losses were reversed later on Friday. The EUR/CHF closed the week at 1.2189.

Bank of Canada keeps rates at 1%

The Bank of Canada kept the main interest rate at 1 percent issued a warning on inflation. 6) In the statement released on Wednesday, the BOC says that: ‘’Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before. At the same time, the risks associated with household imbalances remain elevated’’.

The dovish tone pushed the CAD somewhat lower. The USD/CAD rallied from 1.0930 to 1.0955 in the first hour after the move. The USD gains stop there however and the pair reversed course the following day.

The Canadian jobs report (released at the same time as the US one) showed that employment grew by 25,800, somewhat reversing the 28,900 loss in the month prior. 7) The 25K gain beat analyst estimates for +24,500. Canada’s unemployment rate ticked lower however, from 6.9 to 7 percent. The market didn’t look favourably on the Canadian job results as the CAD was the only currency to lose ground versus the Dollar post-NFP. The USD/CAD gained from 1.0910 to 1.0934 in the first half hour, then went on to clock 14 pips more to hit a daily high of 1.0948. The currency pair retraced during the end of trading on Friday and the USD/CAD closed the week at 1.0931. This was 7 pips up for the day and 93 pips in the green for the week.

Aussie Stays Strong Despite Data Misses

The Australian Dollar was one of the top performing currencies against the US Dollar last week. This happened despite the fact that 3 major news items came in on the low side of analyst estimates. On Sunday, the Building Approvals for the month of April showed a decline of 5.6%. Forecasters were gunning for a growth rate of 2.1%. 8) The data for March was also revised lower from -3.5% to -4.8%.

Monday we had another data miss when the Retail Sales for April showed a growth in the sector of 0.2 percent versus an estimate for + 0.3%. The Current Account data, released at the same time, came in better then the median forecast at – 5.7 Billion AUD. However the positive effect was cancelled out as the Current Account figures for the month prior were revised lower from – 10.1 Billion to – 11.7 Billion Australian Dollars. 9)

AUD/USD Rallies on RBA

On its June meeting, the Reserve Bank of Australia decided to keep interest rates at the 2.5% level. 10) The decision wasn’t a surprise and was widely expected in analysts circles. Still, the currency rallied in the aftermath of the non-move. The RBA Governor said that ‘’Public spending is scheduled to be subdued’’ but also added that ‘’ there are signs of improvement in investment intentions’’. The Bank dropped a reference to a ‘’weak labor market’’ from the monetary policy statement. Stevens didn’t miss an opportunity to jawbone the Aussie lower by claiming that it ‘’remains high by historical standards, particularly given the further decline in commodity prices.’’

The AUD/USD moved up from 0.9252 to 0.9266 in the 30 minutes post-RBA. The Aussie continued to rally in the next few hours, eventually reaching a high of 0.9287 before retracing some of the gains.

The weak Trade Balance on Wednesday was used as another opportunity to load up on cheap currency by AUD bulls. The data showed that Australia had a trade deficit of 120 Million Australian Dollars, contrary to an expected surplus for 400 Million. Last month’s figures were revised slightly higher from + 730 Million to + 900 Million. After an initial 7 pips fakeout, the AUD/USD spiked 30 pips higher to hit a new daily high of 0.9298. The currency pair continued the move up for the rest of the week, eventually closing at 0.9332 on Friday.

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