The ECB Delivered Bold Action But EUR Still Strong Ahead of the US Central Bank Rate Statement
The European Central Bank (ECB) learnt a lesson from the December meeting communication failure and over delivered on market expectations in March. The central bank cut several rates with the deposit rate now at –0.4 percent, a 20 billion euros expansion to its quantitative easing (QE) program that is now 80 billion euros a month, the inclusion of non-corporate bonds as assets available for purchase and a Targeted Longer-Term Refinancing Operations TLTRO II. The statement made waves across the forex market depreciating the EUR. In a sharp twist as soon as ECB President Mario Draghi started giving his press conference to give further details on the bazooka he just blasted it all went topsy turvy as the single currency started to appreciate.
After delivering a kitchen sink approach Mr. Draghi felt confident to mention that negative rates had an inevitable floor and dismissed the two tiered deposit rate system. Taken out of context the comments are fair and have sound logic given Mr. Draghi’s bazooka was still warm, so he felt no need to fire again so soon. The December communication failure was the result of the ECB under delivering after over promising and now in March the central bank found itself over delivering and under promising with a somewhat similar outcome.
The eyes of the market will be focused on the U.S. Federal Reserve Federal Open Market Committee (FOMC) statement and the Fed Economic projections released on Wednesday, March 16 at 2:00 pm DST. Thirty minutes later Fed Chair Janet Yellen will issue a press conference where she will read a prepared statement to be followed by questions from the financial media. Central bankers are losing credibility after their monetary policy actions have proven ineffective to boost growth around the world, so the spotlight on Chair Yellen will prove if the Fed still has the trust of the market.
In a strange turn of events the EUR was one of the winners this week. Only the commodity currencies boosted by the surge in oil prices were ahead of the single currency. The EUR/USD appreciated 1.13 percent in a week that featured a massive commitment to easing from the European central bank. The euro is trading at 1.1154 and had a wide weekly range spanning from 1.0822 all the way up to 1.1218. The high and low of the week both happened in the aftermath of the ECB March easing policy announcement and press conference. The united front that formed to combat the effects of the credit crisis started to crumble as the Fed started signaling an end to low rates. Central bankers went from dampening market volatility by keeping rates at record low to boosting volatility with their diverging monetary policy statements. Rates in the United States and the United Kingdom are awaiting the clearing of strong macro headwinds, but are still in the agenda.
Fed to Remain on Hold and Choose Words Wisely
After keeping rates low and a quantitative easing (QE) program as a result of the crisis in 2008 the U.S. Federal Reserve delivered the much-awaited first rate hike to start a tightening monetary policy cycle in December. Weak economic indicators and a struggling global stock market after the Chinese turmoil at the start of the year have made the projected 4 rate hikes in 2016 farfetched. The sudden drop and recovery of oil prices have had a deep impact as commodity currencies outperform one day, only to give gains back the next day as volatility is fueled by global record production with a possible oil output freeze in the near future.
The CME FedWatch tool points to a 94.2 percent chance the Fed will keep the rate on hold at 0.50 percent. The Federal Open Market Committee (FOMC) will release its statement on Wednesday, March 16 at 2:00 pm DST. Given the reaction the market had to an aggressive showing by the European Central Bank (ECB) the Fed will be more careful in how it crafts its rhetoric as it won’t give hints on the next move by the central bank. The minutes from the December meeting released in January showed there were members who were not entirely convinced the economy was ready for a rate hike. The horrid start of the year has validated some of the concerns from those members and could delay a follow up rate hike until after June, but by then the election cycle would make it difficult for the central bank to intervene without pundits accusing the Fed of having a political agenda.
BOE to Hold in March but Next Rate Change Will be Upwards
The U.K. economy accelerated in 2014 to the point it was at one time the leading candidate for the central bank to raise interests rates ahed of the U.S. Federal Reserve. The drop in commodity prices and lower exports as well as the election cycle put the Bank of England (BoE) on hold for the entirety of 2015. The BoE governor Canadian Mark Carney remains optimistic about growth and by his assessment the negative factors are temporary. The rest of the team at the BoE has been supportive and have issued statements that see the next rate move being a hike. The timing has not been discussed but the markets are not expecting it to happen in 2016 and in some analysts’s view even 2017 might be out of the picture.
The Bank of England is expected to keep the rate unchanged at record low 0.50 percent on Thursday, March 17. The BoE publishes the minutes from the Monetary Policy Committee (MPC) at the same time as the rate statement. They are widely anticipated to show another unanimous vote after the lone dissenter, policymaker Ian McCafferty, rejoined the fold in February.
Brexit anxiety has been rising as the June 23 Referendum date nears. Given the political and social nature of the vote the outcome is uncertain and the volatility in the market reflects that as various polls have not ruled out either outcome. The GBP has been volatile as a result as investors are unsure on what the final vote will bring.
FX Market events to watch this week:
Monday, March 14
8:30 pm AUD Monetary Policy Meeting Minutes
Tentative JPY Monetary Policy Statement
Tuesday, March 15
Tentative JPY BOJ Press Conference
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
Wednesday, March 16
8:30 am CAD Manufacturing Sales m/m
8:30 am GBP Annual Budget Release
8:30 am USD CPI m/m
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
5:45 pm NZD GDP q/q
8:30 pm AUD Employment Change
Thursday, March 17
4:30 am CHF Libor Rate
4:30 am CHF SNB Monetary Policy Assessment
8:00 am GBP MPC Official Bank Rate Votes
8:00 am GBP Monetary Policy Summary
8:00 am GBP Official Bank Rate
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims
Friday, March 18
8:30 am CAD Core CPI m/m
8:30 am CAD Core Retail Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment