FX Insights 10/23 – 10/27

Central bank decisions last week out of the EU and Canada drove volatility in FX markets which saw the euro and Canadian dollar reach 3 month lows against the US dollar. This week central banks are again in focus as the Federal Reserve, Bank of England, and Bank of Japan each make their respective policy announcements.

The Bank of Canada (BoC) and the European Central Bank (ECB) both proved too dovish for investors, inciting a sell-off in both currencies. The BoC left its rates unchanged as widely expected, but stated it would be cautious in making future adjustments to monetary policy. The bank cited high levels of household debt and NAFTA renegotiations as potential risks to the economy. Statistics on GDP, labor, and trade will be released for Canada throughout the week.

The ECB announced a reduction in asset purchases to EUR 30bn from EUR 60bn through the next 9 months while keeping rates unchanged. However, the bank did not set a clear termination date for its asset purchases although strongly hinted that the program should run until September 2018. Furthermore, the central bank indicated that it still sees interest rates remaining at low levels well past the horizon of asset purchases. This would suggest the bank still believes an accommodative monetary policy is necessary given economic conditions and the path of inflation. Eurozone growth and inflation released this Tuesday should help speak to those factors.

This Wednesday the Federal Reserve conducts its last meeting prior to December’s, when the Fed is heavily anticipated to make its final rate hike for the year. As such, this meeting is not expected to hold many surprises and there will be no accompanying press conference. Rather, markets will direct their focus on the line of succession at the Fed. Current indications show Trump leaning towards Federal Reserve Governor, Jerome Powell, but Stanford economist, John Taylor is also in the running. Taylor is seen as the more hawkish of the two but given the fact that Powell represents continuity at the Fed it is probable markets will react well to any conclusive nomination between the candidates. Beyond the Fed race the US will see data released on inflation, personal income/spending, and employment. GDP growth last Friday measured a strong 3% demonstrating the economy’s resilience following the hurricanes, so expect to see some optimism carried over into next week’s reports.

For the first time in ten years the Bank of England (BoE) may raise interest rates following its meeting Thursday. A strong GDP print last week left the door open to a rate hike, yet aside from GDP other economic indicators have not all boded well for the UK. Analysts are expecting a rate hike largely as a consequence of Bank’s officials’ signals rather than the economy’s. Should the BoE raise rates, such an action may still not earn the full confidence of markets given economic uncertainties and Brexit difficulties that remain.

With no significant changes to economic conditions in Japan, the Bank of Japan (BoJ) will certainly hold its current rates and QE targets. The bank’s firmly dovish stance has led markets to regard BoJ meetings as “non-events” in recent months although an October 18th speech by Deputy Governor, Hiroshi Nakaso, raised the possibility that the BoJ “would make adjustments to the shape of the yield curve as necessary.” Still, with little inflationary pressure the prospects of any policy normalization remain distant leaving the yen as a preferred funding currency primarily impacted by counter-currency risks.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, 4cast

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