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Euro Breaks 1.30 on ECB Easing, Pound Falls on Referendum Polls

This is a summary for the forex trading week ending Friday, September 5th 2014. The Euro had one of its worst weeks this year, losing 178 pips against the Dollar and 68 pips against the Japanese Yen as the European Central Bank announced new easing measures.

Euro Flat in First Half of the Week

The single currency spent the first few days of last week in a tight range between a low of 1.3109 and a high of 1.3159 as market participants were waiting for the important ECB decision on Thursday. On Monday the final reading for the German Q2 GDP came in exactly at the -0.2% estimate. 1) The news failed to create a lasting impact in the common currency because the number was exactly as expected and also because the final reading rarely makes a market impact. Traders can already get a glimpse of what the numbers will be from the earlier preliminary reading. Later in the day both the Spanish and the Italian Manufacturing PMI disappointed by coming in at 52.8 and 49.8 respectively. This is particularly bad for Italy because figures below 50.0 indicate industry contraction.

Tuesday and Wednesday were little better for Spain. The Spanish Unemployment Change report for August showed that the number of registered unemployed increased by 8,070. 2) The reading was much better then the 25,000 median forecast. On Wednesday, the Spanish Services PMI beat the 55.5 estimate by coming in at 58.1. However bad news for Italy continued as the country’s Services sector also slipped in contraction. Data showed that the August Services PMI dropped below the 50 mark to 49.8. The bad reports from the Eurozone didn’t stop here, one hour later Europe’s Retail Sales for July revealed a -0.4% drop. 3) Early on Thursday at 2 AM EST, the German Factory Orders for July greatly exceeded market expectations by printing at 4.6 percent. 4)

ECB Cuts Rates, Unveils New Easing Measures

Europe’s single currency fell over 200 pips on Thursday as the European Central Bank first unexpectedly cut rates and then unveiled new easing measures. The Bank cut the main refinancing rate to 0.05% from 0.15%. The interest rate on the marginal lending facility was decreased by 10 basis points to 0.30% as was the rate on the deposit facility to -0.20%. 5) This means that European Banks will now have to pay 0.2% to hold their money at the ECB. At the press conference 45 minutes after the rate cuts, the President of the ECB said that the Bank: ‘’ will purchase a broad portfolio of simple and transparent securities’’. Draghi didn’t want to put a figure on the size of the purchases. When asked if the Governing Council discussed Quantitative Easing, the ECB President said: ‘’Yes, it was discussed. QE was discussed. Some of our Governing Council members were in favour of doing more than what I have just presented, and some were in favour of doing less. So our proposal strikes the middle of the road.’’ 6)

It is rumoured that one of the dissenting voices was the Bundesbank President Weidmann. But Draghi insisted that the decision made today was supported by a ‘’comfortable majority’’ of the Governing Council. The EUR/USD fell over 80 pips on news of the unexpected rate cut, moving from 1.3129 to 1.3045. After outlining the new measures at the press conference, the Euro continued the slide lower until it hit a daily low of 1.2920. After a small rebound on Friday, the common currency closed the week at 1.2950.

Dollar Gains Against Most Majors

The US Dollar gained against most majors last week. The greenback gained 178 pips against the Euro, 28 pips versus the New Zealand Dollar and 263 pips against the Pound. On Tuesday, the ISM Manufacturing PMI for the month of August printed at 59, higher then the 57 median estimate 7). Because of the good result, the US Dollar gained some ground across the board. On Wednesday, the Factory Orders for July came in at +10.5%, very slightly below the 10.9% market forecast.

On Thursday, the ADP jobs report showed that during August, private sector employment increased by 204,000 jobs. 8) Fifteen minutes later, the weekly Unemployment Claims came in at +302,000, slightly below the 298,000 estimate. But both of these important clues about the job market were overshadowed by the ECB press conference that was happening around the same time.

US Economy Adds 142,000 Jobs in August

The all-important NFP Report released on Friday showed that the US economy added 142,000 jobs in August. 9) This was a fairly large miss from the 226,000 median estimate. In some positive news, the Unemployment Rate ticked down from 6.2% to 6.1 percent but this was already expected by market participants. The 142K number is the lowest amount of jobs created this year and below any of the 93 forecasts in a Bloomberg survey, where estimates ranged from 190,000 to 310,000. 10)

The initial reaction to the miss was US dollar losses across the board. The EUR/USD rose from 1.2942 to a high of 1.2987 in the first two minutes after the report, with most of the gains happening instantly. Later in the day however the Euro started to slowly bleed pips and by the close of the week the single currency was quoted at 1.2950.

Dollar Gains, Ruble Loses on Geopolitical Tensions

The US Dollar was somewhat helped by geopolitical tensions. The NATO military alliance held a summit in Wales this week. The alliance issued a statement that it “stands with Ukraine” in the face of Russia's destabilising influence. 11) The statement called on Russia to pull back its troops from Ukraine and end the illegal annexation of Crimea. As a direct consequence of the summit, the NATO members agreed to form a new reaction force that will be deployed in Eastern Europe. Some countries members of the alliance also vowed to help Ukraine with non-lethal military aid and military advisers.

In addition, the EU agreed to slap new sanctions on Moscow for its invasion of Ukraine. The new measures will make it more difficult for state owned Russian companies to raise capital abroad. The EU will also expand its list of persons and companies under sanctions. 12) In trilateral talks held in Minsk this week, representatives of Russia, Ukraine and the two self-proclaimed republics Donetsk and Luhansk, singed a ceasefire agreement. 13) Sporadic clashes continue in the Eastern parts of Ukraine despite the deal. The 12 point agreement calls for prisoner swaps and a buffer zone along the Ukraine-Russia border. The deal also promises some decentralisation for Donetsk and Luhansk.

As expected, it was a tough week for the Russian Ruble. Despite the ceasefire plan, Western nations will go ahead with the sanctions. It’s up to Moscow to prove that it can hold its end of the bargain. If it does, the new restrictions may be lifted or suspended in the future. The USD/RUB hit an all-time high (post the 1998 Ruble devaluation) of 37.49. From here, the Ruble gained somewhat after the Friday’s ceasefire deal. The pair closed the week at 36.85. If the truce holds and the sporadic clashes don’t turn into an open conflict, the Ruble will probably be spared further losses. In case of escalation, expect the 37.49 high to give way.

Pound Falls on Scottish Referendum Polls

The UK Pound fell 263 pips against the Dollar, 126 pips versus the Japanese Yen and 56 pips against the Euro last week. Most of the losses occurred because of a set of Scottish referendum polls. With the ballot on Scottish independence just two weeks away on September 18th, the foreign exchange market is in the process of re-pricing risk. The going assumption was that the ‘’NO’’ camp was a sure win. But a new set of polls released last week showed the ‘’YES’’ camp gaining ground. On Tuesday a new YouGov poll 14) showed support for the independence growing to 47 percent. On that day the Pound lost 139 pips against the Dollar, one of its worst losses against the greenback this year.

A YouGov poll released on Saturday even placed the ‘’YES’’ camp in the lead! Fifty-one percent of respondents said that they will vote for Scotland’s separation from the UK, versus 49% against. 15) The percentages exclude those who wouldn’t vote or don’t yet know which way they will vote. With those groups included ‘’Yes’’ are on 47% and ‘’No’’ are on 45%. The GBP/USD closed at 1.6328 on Friday. With the new results showing a lead for the ‘’YES’’ campaign, the forex market will likely continue to re-price the Pound lower. Several financial institutions have come out with their own estimates of what will happen in case of Scottish independence. The overall consensus is that, at least in the short-term, the event will be negative for Cable. The separation will lead to negotiations with London on partitioning state assets and the UK debt burden.

UK Data Mixed, BOE Stands Pat

In other UK related news, data released during the previous five day trading period came in mixed. On Monday, the Manufacturing PMI printed at 52.5, below the 55.1 analyst estimate. 16) Lending in the country improved, as shown by the Net Lending to Individuals report. Contrary to manufacturing, things are looking up in Construction. The Construction PMI for August beat the 61.5 forecast by coming in at 64. 17) On Wednesday, the Services PMI also improved, gaining from last month’s 59.1 to 60.5. The figure is also higher than the 58.6 median estimate.

At its monetary policy meeting on Thursday, the Bank of England kept the main interest rate at 0.5%. 18) The size of the purchased assets will remain at £375 billion. There has been no major change in BOE policy for two years now, despite the on-going UK recovery. The last time the Bank made some changes was back in July of 2012, when it increased the size of the asset purchase facility by £50 billion. The initial reaction to the non-decision was a very small dip in prices of around 7 pips. But as the day went on, the Pound got swept up by the ECB inspired selling and the currency pair closed Thursday 133 pips lower against the greenback.

Aussie Gains on GDP, Trade Data

The Aussie came out as the winner in last week’s trading session. The island nation’s currency rallied 142 pips versus the Japanese Yen, 102 against the New Zealand Dollar and 54 pips versus the US Dollar. The Aussie had a fairly large trading range last week. The AUD/USD initially lost 61 pips against the US currency in the first two days, with most of the losses occurring on Tuesday, in the aftermath of the RBA policy meeting. While the Reserve Bank of Australia kept rates at a record low of 2.5 percent for a 13th month in a row, in the accompanying statement Governor Stevens said that: ‘’The local exchange rate remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.’’ 19) The AUD/USD fell by 59 pips on Tuesday alone.

The Aussie’s fortunes reversed in the second part of the week however. The pair rallied over 100 pips from a low of 0.9262 on Wednesday and closed at 0.9377 on Friday. The currency got some help from the Australian second quarter GDP, which came in at 0.5%. 20) While this is a slowdown from Q1 that saw the economy growing at 1.1%, it is still higher compared to the 0.4% analyst estimate. The country’s Retail Sales for July (that came in on target) and the Trade Balance also fuelled the rally in the Aussie. Data showed that the difference in value between imported and exported goods and services during July shrank from last month’s -1.56 billion to -1.36 billion. 21)

Japanese Yen Falls on BOJ Kuroda Comments

The Japanese Yen suffered as the Governor of the Bank of Japan Kuroda indicated that he wants a weaker currency. But let’s start from the beginning. On Sunday, data showed that Capital Spending in the country increased by 3 percent. 22) While this is a positive development, the figure was lower then what market participants expected, a growth of 3.8%. The data was also lower compared to the previous quarter’s 7.4% but a lot of that growth was probably due to frontloaded demand from the expected April sales tax hike. A bit later in the day the final reading for the Manufacturing PMI basically confirmed the previous figures of 52.4 by coming in at 52.2. Data late on Monday revealed that the country’s Monetary Base continues to shrink. The Base fell to 40.5% in August, below both the previous 42.7% number and the 43.7 percent forecast. In some good news for Japan, the Average Cash Earnings increased by 2.6% in July, ‘’beating’’ the 0.9 percent analyst estimate. 23)

The big ticket news item this week was of course, the latest Bank of Japan monetary policy meeting. The Bank decided to keep policy unchanged. The annual pace of asset purchases was kept in the 60 to 70 trillion Yen range, as expected by most analysts. 24) What was somewhat unexpected were dovish comments by Kuroda, the BOJ Governor. At the press conference few hours after the decision was published, Kuroda told reporters that he wouldn’t be surprised if the dollar strengthens against the yen and added ‘’I don’t think that would be particularly bad for Japan’s economy’’.

The Japanese Yen initially weakened by only 15 pips against the Dollar on the remarks but by the end of the trading day, the USD/JPY rallied some more and closed at 105.26, 42 pips higher compared to its pre-press conference price. The currency pair continued the move up on Friday, rallying to a high of 105.70. But from here, profit taking pushed prices lower and the USD/JPY ended the week at 105.07, still 91 pips in the green.

Swiss Franc Creeps Toward 1.20

The Swiss Franc is again creeping toward the 1.20 level. This is an important line in the sand for the EUR/CHF. Back in September of 2011 the Swiss National Bank imposed a 1.20 floor in the EUR/CHF exchange rate. The decision was taken in the midst of the European debt crisis. The Swiss Franc benefited from large safe haven flows but the Bank was worried that the gains in the currency will hurt exporters. The floor has been in place ever since and the SNB has accumulated a balance sheet of over 400 Billion Swiss Francs in the process of defending the 1.20 level.

With prices now trending lower on renewed Euro losses, currency traders look set to again test the SNB resolve. Last week the currency pair traded to a low of 1.2044 before rebounding and closing at 1.2061 on Friday. The Foreign Currency Reserves report released last week showed that the Bank hasn’t significantly increased its balance sheet, it other words, it hasn’t intervened in the currency markets yet. Data showed that Foreign Currency Reserves in August increased very slightly from 453.35 Billion to 453.79 Billion Swiss Francs. 25)

Bank of Canada Keeps Rates at 1 Percent

On the monetary policy meeting held on September 3rd the Bank of Canada decided to keep interest rates at the 1 percent level. 26) The BOC said that inflation is around 2 percent and added that it is ‘’evolving as the Bank has anticipated’’ in its July monetary policy report. While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring, the press release reads. The USD/CAD initially spiked higher from 1.0910 to a high of 1.0926. But after confused market participants went through the decision, they bought the CAD and pushed it past the 1.09 level. By the end of the day, the currency pair was trading down by 24 pips.

Friday saw the release of another important piece of Canadian news, the country’s Job Report. The data somewhat vindicated the BOC call not to raise interest rates few days earlier. The number of employed people during the previous month fell by 11,000, a sharp contrast to the 10,300 gain expected by analysts. In some positive news, Canada’s unemployment rate stayed at the 7 percent level. 27) The USD/CAD has a volatile Friday with both the Canadian and the US Jobs reports coming out at the same time (8:30 EST). With both reports disappointing by coming in substantially below the median market forecast, it wasn’t surprising to see the USD/CAD close the day almost unchanged at 1.0880 compared to its daily open at 1.0872.

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