The forex trading week has come and gone. Time to take a look at the currencies and/or currency pairs that were on the move and what moved them. Were you able to profit from any of this week’s top movers?
Five out of the top ten movers during this forex trading week were Kiwi pairs and the Kiwi was the losing currency to boot, so it’s probably safe to conclude that the main theme this week was Kiwi weakness. Interestingly enough, we also had yen and Greenback weakness as minor themes, together with euro strength and another strong performance from the Aussie.
What was driving this week’s forex price action? Let’s dive right in, shall we? And we’ll begin with this trading week’s top loser – the Kiwi.
The RBNZ’s Monetary Policy Decision
- Unexpected rate cut from 2.50% to 2.25%
- RBNZ downgrades downgraded inflation projections
- RBNZ jawbone the Kiwi, saying that “a decline would be appropriate”
- RBNZ said that “monetary policy will continue to be accommodative”
- RBNZ also said that “further policy easing may be required”
The RBNZ surprise most forex traders and analysts by slashing the Official Cash Rate (OCR) from 2.50% to 2.25%. Forex Gump has a more detailed write-up on what the RBNZ had to say, so go ahead and read up on that if you want the specifics (read it here).
The gist of it all is that the surprise rate cut was preemptive in nature. Specifically, it’s meant to help support growth, given the RBNZ’s projection that New Zealand’s trading partners will grow at a slower pace, which will lower demand for New Zealand’s exports, namely dairy products. The rate cut was also meant to ward off the possibility that slower global inflation may pull down New Zealand’s own inflation, as well as lower inflation expectations that may become self-fulfilling, especially if businesses use the aforementioned inflation expectations in setting wages and prices.
Anyhow, the surprise rate cut was reason enough to go on a Kiwi selling spree, but it certainly didn’t help that RBNZ Governor Graeme Wheeler said in his official press release that:
“The trade-weighted exchange rate is more than 4 percent higher than projected in December, and a decline would be appropriate given the weakness in export prices.”
Wheeler was, in essence, saying that the Kiwi was too strong and should weaken. Wheeler also said that:
“Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”
Yep, that’s right. We can expect more easing moves if things don’t improve.
The ECB’s Monetary Policy Decision
- ECB cuts refinancing rate to 0.00% vs. maintain at 0.05% expected
- ECB cuts marginal lending rate to 0.25% vs. maintain at 0.30% expected
- ECB cuts deposit rate to -0.40% from -0.30% as expected
- ECB expands QE program from €60B to €80B starting in April 2016
- ECB will launch a new series of four TLTROs starting in June 2016
- Further rate cuts may no longer be needed
As I reported in Thursday’s morning London session recap, most forex traders and analysts were only expecting a rate cut for the deposit rate, but the ECB went much further by cutting rates across the board and expanding the QE program by €20 billion to €80 billion, not to mention a new series of targeted longer-term refinancing operations (TLTRO).
TLTROs are essentially just loans with very low interest rates that the ECB provides to banks in the euro zone. These banks then loan out this “free” or “easy” money to businesses and individual consumers, or invest it in higher-yielding (but riskier) asset classes in the hopes that they’ll get better returns. So now you know why risk appetite, especially for European equities, ramped up when the ECB announced its stimulus package.
The verbatim breakdown for the stimulus package, courtesy of the official press release, is as follows:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.
- The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.
- The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.
- The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.
- Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.
- A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.
If you want to know the difference between and among the various interest rates, Forex Gump has yet another write-up that you can read here.
Moving on, the easing measures and sudden surge in risk-taking activity caused the euro to broadly weaken. However, the euro had a reversal of fortunes when risk aversion made an overwhelming comeback during the U.S. session, as the ECB press conference went under way. And the statements that practically every market analyst is blaming for the sudden switch in sentiment are as follows:
“How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases. From today’s perspective, and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”
The short of it is that the ECB is no longer expecting more rate cuts down the road, and market players priced that in by buying up the euro while dumping European equities. Incidentally, the Swiss franc and the pound were also dragged along for the ride, likely due to the close trade relations between the euro zone and U.K. and Switzerland.
Monetary Policy Divergence
Okay, we’ve covered the main, respective catalysts for the Kiwi’s weakness and the euro’s strength, so let’s take on the broad demand for the Aussie and the overall weakness of the Japanese yen and the Greenback. And it may not seem obvious at first, but the fine thread tying all these currencies together is monetary policy, specifically the fact that their respective central banks have different monetary policy biases, or at least forex traders perceive that they have diverging policy biases.
Let’s tackle the Aussie first. The table of top forex movers for the week doesn’t show it, but the Aussie dominated its forex rivals during the trading week, as you can seen on the table below.
There were reports that iron ore jumped by around 19% to $63.74 per dry metric ton on Monday, and then jumped another 6% to $65 per dry metric ton on Tuesday, which fueled demand for the Aussie at the time due to iron ore being a major Australian export. However, the iron ore rally faltered mid-week and yet the Aussie kept on advancing and ended the trading week on a high note versus its peers. What gives?
The likely answer to that is, again, monetary policy divergence. If y’all can still recall, I highlighted in last week’s Top Forex Market Movers that the Aussie was able to trump all its forex rivals last week due to the RBA’s decision to maintain the cash rate at 2.00% while presenting a positive outlook. Another major catalysts was the better-than-expected reading for Australia’s Q4 2015 GDP, which further reinforced the RBA’s positive outlook.
The positive outlook implies that the RBA isn’t looking to ease any further, which is similar to the ECB’s outlook while being the opposite of the RBNZ’s monetary policy bias of being open to further easing. Admittedly, RBA Governor Stevens did say in his statement that:
“Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
This just means that the RBA is open to easing further if necessary, but he RBA’s upbeat outlook heavily implies that they won’t be easing any time soon.
Moving on, the Greenback and the Japanese yen were two of the weakest currencies during the session since both currencies only won out against the poor Kiwi while being roughly equal to each other, given that USD/JPY was essentially unchanged for the week.
Again, this puts monetary policy divergence front and center since forex traders are expecting the BOJ to either ease further or give hints of further easing down the road in next week’s BOJ monetary policy statement (Tuesday, March 15), given the current state of the Japanese economy. Unnamed sources interviewed by Reuters say that further rate cuts are not on the table, however, so keep an eye on that.
As for the Greenback, forex traders are no longer expecting a rate hike for this coming Wednesday’s (March 16) FOMC statement, and forex traders are divided on how many rate hikes we’ll see this year, or if we’ll see more rate hikes at all.
Do you think monetary policy divergence will continue to influence forex trends? Better keep that market theme in mind when planning your trades for next week!