London Session Forex Recap – Sept. 15, 2016

  • SNB Libor rate: unchanged at -0.75% as expected
  • SNB sight deposits rate: unchanged at -0.75% as expected
  • U.K. retail sales m/m: -0.2% vs. -0.4% expected, 1.9% previous
  • U.K. retail sales y/y: 6.2% vs. 5.4% expected, 6.3% previous
  • U.K. core retail sales m/m: -0.3% vs. -0.7% expected, 2.1% previous
  • U.K. core retail sales y/y: 5.9% vs. 4.8% expected, 5.8% previous
  • Euro Zone final HICP y/y: unchanged at 0.2 as expected
  • Euro Zone final core HICP y/y: unchanged at 0.8% as expected
  • Euro Zone trade balance: €20.0B vs. €29.6B expected, €23.8B previous
  • BOE: 9-0 vote to maintain the Bank Rate at 0.25% as expected
  • BOE: 9-0 vote to continue government bond purchases up to £435 as expected
  • BOE: 9-0 vote to continue corporate bond purchases up to £10B as expected
  • Economic outlook of MPC members still in line with the August Inflation Report
  • MPC members will reassess outlook during the November Inflation Report
  • If outlook in November is still in line with August, then the majority expect another rate cut

The spotlight was on the pound during the morning London session, thanks to the BOE’s MPC statement. And it turns out that MPC officials still have an easing bias, which is probably why the pound got slapped lower.

Major Events/Reports:

U.K. retail sales reportRetail sales volume in the U.K. contracted by 0.2% month-on-month between the months of July and August. But on a more upbeat note, this is shallower than the expected 0.4% decline. Also, the previous reading was upgraded from +1.4% to +1.9%.

The decline printed by the monthly reading was apparently due to the 5.3% drop in sale volume for household goods, as well as the 3.4% slump in sales volume for clothing and footwear.

Moving on, retail sales volume expanded by 6.2% year-on-year, soundly beating expectations of a 5.4% increase. Furthermore, the previous reading was upgraded from +5.9% to +6.3%.

SNB monetary policy decision – As expected, the Swiss National Bank (SNB) maintained its current monetary policy. The target range for the Libor rate is therefore still between -1.25% and -0.25%, with the median target rate at -0.75%. Meanwhile, the interest rate on sight deposits was maintained at -0.75%.

The SNB also repeated its promise (or threat) that it would “remain active in the foreign exchange market, as necessary” because it believes that the Swissy is “still significantly overvalued.”

Regarding economic outlook, the SNB expects GDP growth to moderate in the second half of the year, “partly owing to a temporary weakening of growth in Europe.” It still expects the Swiss economy to grow by around 1.5% for all of 2016, though.

As for inflation, the SNB maintained its inflation forecasts for 2016 at -0.4%. However, it slightly downgraded its inflation forecasts for 2017 and 2018 from +0.3% and +0.9% respectively to +0.2% and +0.6%. Do note that these forecasts assume that the Libor rate remains steady at the median target range of -0.75%, so the SNB is apparently not in any hurry to change its monetary policy.

MPC rate decision and minutes – The BOE’s MPC released the minutes for its monetary policy huddle, and below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • The MPC unanimously voted to maintain the BOE’s current monetary policy.
  • 9-0 vote to keep the Bank Rate at 0.25%.
  • 9-0 vote to continue government bond purchases up to a total of £435.
  • 9-0 vote to continue corporate bond purchases up to a total of £10B.
  • The MPC “will monitor closely changes in asset prices and in interest rates facing households and firms and their effect on economic activity.”
  • The Committee now expect less of a slowing in UK GDP growth in the second half of 2016
  • Relative to projection in the August Inflation Report, near-term momentum of the U.K. economy is “slightly to the upside.”
  • Despite the two above points, “The Committee’s view of the contours of the economic outlook following the EU referendum had not changed.”
  • In simple English, they still expect the U.K. economy to deteriorate.
  • There will be a reassessment during the November Inflation Report.
  • If the assessment for November is still in line with the August inflation report, then “a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”
  • In simple English, if projections for November are still as bad as in August, then most MPC members will vote for a rate cut.
  • The MPC currently judges this bound to be close to, but a little above, zero.”
  • Kristin Forbes and Ian McCafferty opposed additional government bond purchases in August and they still do so.
  • However, they decided not to vote against it this time because of “the potential costs to the economy of immediately reversing the programme underway.”
  • Forbes is also still opposed to corporate bond purchases but decided not to vote against it for the same reason as above.
  • Q3 GDP is expected to grow by 0.3% quarter-on-quarter, but will have a preliminary reading of 0.2%.
  • This is an upgrade from the original +0.1% projection and a preliminary reading of +0.0%.

Oil recovers – Oil benchmarks were in negative territory when the morning London session rolled around. However, oil finally got some buyers about halfway through the session. It’s still not clear what the catalyst was, though.

  • U.S. WTI crude oil was up by 0.69% to $43.88 per barrel
  • Brent blend crude oil was up by 0.89% to $46.26 per barrel

Major Market Movers:

GBP – The pound had some good two-way action during the session, although betting against the pound would have definitely been more profitable. Anyhow, the pound first got a broad-based boost when the readings for retail sales volume in the U.K. managed to beat expectations.

However, the pound was later slapped lower against all its peers shortly after the BOE’s MPC members announced their decision to keep their powder dry for now, probably because the MPC members also explicitly maintained an easing bias.

GBP/USD was down by 16 pips (-0.12%) to 1.3200 with 1.3248 as session high, GBP/CHF was down by 45 pips (-0.35%) to 1.2842 with 1.2929 as session high, GBP/CAD was down by 71 pips (-0.41%) to 1.7408 with 1.7503 as session high

CHF – Despite the risk-on mood ahead of the MPC statement, as well as the SNB’s promise (or threat) that it would “remain active in the foreign exchange market,” the Swissy just plowed through most of its forex rivals. The Swissy’s strength may have been due to profit-taking since the Swissy broadly weakened during the late Asian session and before the SNB monetary policy announcement.

USD/CHF was down by 22 pips (-0.23%) to 0.9729, EUR/CHF was down by 13 pips (-0.12%) to 1.0943, CHF/JPY was up by 21 pips (+0.20%) to 105.14

CAD – The Swissy may have been in demand, but the turnaround in oil prices during the session allowed the Loonie to steal victory from the Swissy and emerge as the one currency to rule them all (during this session at least).

USD/CAD was down by 38 pips (-0.29%) to 1.3189, CAD/JPY was up by 20 pips (+0.25%) to 77.55, CAD/CHF was up by 4 pips (+0.06%) to 0.7376

Watch Out For:

  • 12:30 pm GMT: Headline (0.1% expected, -0.4% previous) and core (0.1% expected, -0.3% previous) readings for U.S. PPI
  • 12:30 pm GMT: Headline (-0.1% expected, 0.0% previous) and core (0.2% expected, -0.3% previous) readings for U.S. retail sales
  • 12:30 pm GMT: U.S. initial jobless claims (265K expected, 259K previous)
  • 12:30 pm GMT: U.S. current account (-$121.0B expected, -$124.7B previous)
  • 12:30 pm GMT: Empire State survey (-1.00 expected, -4.21 previous)
  • 12:30 pm GMT: Philadelphia Fed survey (1.0 expected, 2.0 previous)
  • 1:15 pm GMT: U.S. industrial production (-0.2% expected, 0.7% previous)
  • 1:15 pm GMT: U.S. capacity utilization (75.7% expected, 75.9% previous)

See also:

Asian Session Forex Recap

U.S. Session Forex Recap

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