Moves in the FX market have been increasingly volatile in recent weeks, and this was no exception. Some may have been expecting a sharper move in the Pound given the importance of the announcement, however the nature of an all-day vote meant that the currency was subjected to episodic volatility as the votes were updated but no major surprise as it gradually become clear the No votes had the victory; Scotland is set to remain in the United Kingdom for now. Despite a shock result, the Pound managed a respectable range of 350 pips this week with GBP/JPY and GBP/AUD both exceeding 500 pips in the lead-up to the vote. While the result helped regain some strength for the pound, longer term the close result does provide some cause for concern. Votes are still being tallied, however the final vote is looking likely to fall around the 55%/45% mark in favour of No – a fairly even contest and indicative of future interest in another referendum. The pound sits at around 1.6450 at the time of writing.
The ECB allotment was surprisingly low compared to analyst forecasts, but failed to generate much heavy trading. Economists had expected an uptake of between 100 and 300 Billion Euros for the first T-LTRO program, however the program only generated interest of 82.6 Billion. The Euro did not react much on the announcement, drifting lower by a quarter of a cent before finishing the day around half a cent higher against the US dollar. The uptake means that the next program in December will need a very strong subscription in order for the ECB to offset its shrinking balance sheet. The two new T-LTRO’s must offset the previous LTRO’s which are maturing in January and February 2015.
The FOMC Statement and press conference caused strong demand for the US Dollar. The Statement itself was not overly hawkish, thought the new dissenting voice of Richard Fisher:
“President Fisher believed that the continued strengthening of the real economy, improved outlook for labour utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance.”
While the Fed kept it’s wording:
“… that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends…”
There was some speculation that this would be altered to reflect the next step in tightening after Quantitative Easing ends. What was confirmed, however, is that QE is on track to end next month with the Fed choosing to reinvest maturing securities until after the first rate rise occurs. This means that while the Fed’s balance sheet will no longer grow it will stay roughly constant in nominal terms until the Fed begins its rate tightening cycle. After this point the Fed is likely to simply allow its security holdings to mature and will remit the profits to the US Treasury. The move was felt strongly in all US Dollar pairs, with EUR/USD falling over 125 pips and USD/JPY rising around 150 pips.
Today marks the beginning of a potentially volatile trading period for the Pound, Euro and US Dollar due to three major news events. The FOMC is the first to affect markets, with the FOMC statement to be released at 21:00 server time today; this will be followed by a press conference at 21:30 server time where Janet Yellen will expand upon the FOMC statement and then take questions regarding monetary policy.
Analysts have been focusing heavily on the wording of interest rate rises as the potential market mover:
“The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”
There is some speculation that with Quantitative Easing considered on autopilot to end in October, the Fed will change this sentence to reflect that rates could start rising by mid-2015. With economists generally accepting that the FOMC will reduce asset purchases by a further 10 Billion at this meeting, there is also potential for them to outline how the final 15 Billion will be reduced. Current expectations are that this final amount concludes in October and the purchases will be concluded at next month’s meeting. With tapering largely priced in, most of the action in currency markets is likely to surround the wording of interest rate rises above, as well as any indication on next month’s tapering and the concurrent economic forecasts.
The European Central Bank is the next in line to move currency markets; the ECB will announce the allotment of its first Targeted Long Term Refinancing Operation on Thursday. The ECB released the following updated modalities in July regarding the timing of the programs – the allotment at 11:15am Frankfurt time is likely to be the market mover:
Since zero interest rate policy was reached during the GFC, traders have had one eye on central bank balance sheet expansion as an indicator of easing; T-LTRO’s being one way in which the ECB can expand its balance sheet. Traders will be looking at the size of the allotment relative to expectations as a guide to which way the Euro will move. While it is never clear exactly how the market will react, a strong uptake could lead to Euro weakness as traders see the ECB expanding its balance sheet by a larger amount, while similarly a weak uptake could see a short squeeze as implied easing is not confirmed and positions unwind. Since the previous LTRO programs, banks have been repaying their loans prematurely which has put downwards pressure on the ECB’s balance sheet; the ECB is seeking to buck this trend and return the balance sheet to 2012 levels.
There are some factors that will influence the uptake of the program that are worth considering. Firstly, while the program is intended to stimulate new lending to the private sector there is no clear penalty in place for misdirection of the funds away from lending apart from early repayment of the funds – this may lead to demand for other purposes. The ECB states:
“Counterparties that have borrowed in the TLTROs but whose eligible net lending in the period from 1 May 2014 to 30 April 2016 is below the benchmark will be required to pay back their borrowing in September 2016, in accordance with the ECB Decision.”
However with yields far lower now than at the time of the previous LTRO’s it is not clear that the risk/return profile is still favourable for this sort demand.
Secondly, the ECB’s latest rate cut brings the cost of funding through the program down to 15 basis points, which should help to spur demand for the funding and may have been a factor in the ECB’s decision to surprise markets at the previous meeting.
Thirdly, while not directly related to the current uptake of the program it should be noted that the current LTRO’s occur around the same time as the previous LTRO’s from 2011 and 2012 are maturing. These programs mature in January and February 2015 and will partly offset the balance sheet increase due to the new round of T-LTRO’s as banks repay previous loans.
During the ECB allotment – but to be announced afterwards – Scottish citizens will be voting in a referendum as to whether Scotland should be independent from the United Kingdom. A ‘Yes’ vote will mean Scotland separates from the union, while a ‘No’ vote will result in the country staying a part of the UK.
Votes are strongly divided according to the most recent polling by YouGov, with 52% of those surveyed indicating a No vote and 48% indicating a Yes vote on a head to head basis. On current indications this means that there would be no separation between the countries. One thing to keep in mind is that these polls exclude those who don’t know or wouldn’t vote, and these citizens may not feel strongly enough about the separation to take the plunge and vote Yes.
That said, Scotland would be likely to control the majority of oil revenues coming out of the current United Kingdom, with some analysts indicating that Scotland would receive up to 90% of oil revenues – a great boon for the economy and one reason for a strong showing on a Yes vote.
A Yes vote is likely to have an effect that reaches farther out than the UK economy. The Pound has potential to drop or rise very strongly depending on the outcome; the effect will depend upon both the positioning of traders ahead of the release and outcome.
The Pound is not the only currency that could move sharply on an announcement; the sentiment in Europe for parting from various unions such as Catalonia from Spain and Greece from the Euro would be heavily influenced by Scotland setting a precedent. Traders should be on the lookout for knock-on effects of the vote on currencies such as the Euro during this time. Historic events such as this can have dramatic outcomes, and the effect on markets can present both opportunity and risk.
This week has the potential to be one of the more important in the latter half of the year, with the combination of the FOMC statement, the UK/Scottish Independence Referendum and the ECB’s first Targeted LTRO program. While these headlines will dominate trading for the week, there is plenty of supporting data to keep traders busy.
Tuesday will be the start of a volatile period with the RBA releasing its monetary policy meeting minutes. The minutes will be closely watched for an indication of where the RBA’s next interest rate move is likely to be. The central bank has held interest rates at 2.50% since August 2013 and there is a case to be made for both rate cuts and rises; with strong house price growth bringing calls of a housing bubble and a weak economy in the wake of the mining investment boom Governor Glenn Stevens is caught between a rock and a hard place on how to use the blunt tool of interest rates. For Australian dollar traders, any indication about which way the bank will begin to lean is highly sought after.
Bank of Japan Governor Kuroda is the next to influence markets. With the central bank’s QE program helping to send the Yen to levels not visited for 6 years, there have been rumours that the BoJ may further expand the program towards the end of the year to once and for all vanquish the threat of deflation. This rumour is offset by a falling approval rating for Shinzo Abe, with many disapproving of the policies that have been the hallmark of his tenure. Some economists have noted that the inflation is the wrong kind, being cost-push and driven mostly by rising energy prices which must be important with a weaker Yen. The right kind of inflation might be driven by rising demand for consumption and investment among the private sector, accompanied by wage growth. The press conference will be one to watch to see if Kuroda uses the platform to further influence traders’ expectations on the bank’s policy.
Ahead of the Scotland Independence Referendum, UK CPI will come out Tuesday at 11:30am server time. The data point may pale in comparison to the coming independence vote, but the data will be important in the medium term for interest rate expectations; economists expect a slightly lower 1.5% reading for this month compared to the 1.6% last month. UK data stays strong all week, with employment data the next to be released at the same time as the MPC’s Bank Rate Votes. Employment is expected to have a strong showing this month, with wages forecast to grow 0.5%; unemployment claims are also expected to decrease by 29,700. The Bank rate votes will also be important; the August votes revealing the first dissenting votes in a long time and indicating that two members had a preference for raising interest rates. The Pound sits at 1.6240 after retracing last week’s weekend gap.
A more detailed analysis of the FOMC statement, LTRO allotment and the Scottish Independence vote will follow on Wednesday.
The Australian dollar spiked higher on Thursday by half a cent on the release of surprising employment numbers. The report showed that the number of employed people had jumped a seasonally adjusted 121,000; the unemployment rate fell to 6.1%. As a reminder, analysts were expecting an increase employed persons of 15,200 and an unemployment rate of 6.3%. The discrepancy resulted in disbelief and ridicule from various market commentators, and perhaps rightfully so.
The last two figures have come in to question over the seemingly unbelievable month on month changes. The issue again is related to a changed survey sample, resulting in increased volatility in the monthly numbers. The 121,000 figure represented a huge outlier and the highest figure in the series since 1978. Traders reacted with initial shock, however once the reality sank in that this was subject to noise and seasonal adjustment they resumed selling the Aussie to bring the currency down a further one and a half cents. The Australian dollar reached a low of 0.9060 overnight.
The RBNZ held steady on interest rates as expected, signalling a continuation of a period of interest rate stability with expectations that further tightening could occur if warranted:
“In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment. Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.”
The New Zealand dollar reacted with a small sell-off, and the currency is down over half a cent since the announcement hit the airwaves.
The Pound continued to rally strongly on Scottish independence news, with a new poll released by YouGov showing a shift back towards favour of staying within the currency union; the new results showed that the votes were currently 52% / 48% in favour of a No vote on independence. The Pound regained two cents against the US dollar, but the major move was in the Yen cross; GBP/JPY has risen over 500 pips since the selloff that started the week. The referendum is scheduled for September 18th next week.
The remainder of the week is light on for market moving news, however US numbers out tonight may provide enough impetus for a small reversal or continuation. Core Retail Sales and Retail Sales are expected to grow at 0.2% and 0.3% respectively, while UoM Consumer Sentiment is forecast to show a slight uptick to 83.2
The Pound continued to fall a further one and a half cents against the US dollar on fears of a split between the UK and Scotland at the upcoming referendum for independence, completed on September the 18th. The UK currency reached a low point of 1.6060 yesterday after some as-expected data – Manufacturing Production increased 0.3% over the month, however this was in line with forecasts and failed to surprise the market. At the Trade Union Congress, BoE Governor Mark Carney signalled that a rate rise may occur as soon as spring 2015, which may have been a slower tightening cycle than market participants expected, with a decline of over half a cent following the speech. With the Inflation Report Hearings today, GBP volatility may be an ongoing theme.
The resilient Australian dollar has finally shown signs of heading lower with commodity prices and the terms of trade. The Dollar broke out of a range that has been in place since April, with a fall of two and a half cents sparked by sliding sentiment surveys and some underwhelming credit growth data. The NAB Business Confidence survey declined from 10 to 8 on Tuesday, while the Westpac Consumer Sentiment survey showed a decline of 4.6%. Amongst the weak surveys, Home Loan Growth was also released, showing a growth of only 0.3% over the previous month. While none of the data was particularly damming for the Australian economy, the persistent US dollar strength helped guide the currency lower to 0.91550.
Tomorrow morning should provide opportunity for trading Australasian currency pairs, with New Zealand announcing their Cash Rate during roll-over, which is expected to remain at 3.50% after a series of rate rises. Following on from this will be Australian Employment data and Chinese CPI. Employment is expected to grow strongly, with 12,200 jobs expected to be added and the unemployment rate expected to tick down slightly to 6.3%. This report follows a shocking release last month which saw the unemployment rate skyrocket. There was indication was some of the jump was related to a change in the survey rather than a dramatic deterioration in conditions. Chinese CPI is expected to moderate even lower to 2.2%.
ECB President Mario Draghi will speak at the Eurofi Financial Forum tomorrow night and BoJ Governor Kuroda will speak the following morning on Friday – neither are expected to provide a shock for traders, however the events are something to be aware of. Friday wraps up the trading week with some US data. Core Retail Sales and Retail Sales are expected to grow at 0.2% and 0.3% respectively, while UoM Consumer Sentiment is forecast to show a slight uptick to 83.2
The Pound continued its decline over the weekend, with the UK currency falling over 150 pips from Friday’s close. The Pounds fall was related to a poll result released by YouGov Plc – the announcement indicating that a slight majority are in favour of Scotland leaving the union and forging its own path over staying attached to England. The yes votes have been steadily gaining ground against the no votes since early August with this poll result the first to see Yes votes (in favour of independence) overtake No votes on a head to head basis – in early August the results were skewed as much as 39% to 61% in favour of staying within the union.
The referendum on whether the two countries should remain in union will occur on September the 18th – the same day as the first T-LTRO is scheduled by the ECB – with indications that it could be a market shaking day regardless of the outcome. The Pound currently sits at 1.6200 after recovering some of the losses at market open. Data out of the UK this week should continue to provide trading opportunities with Tuesday’s speech by Governor Carney at the same time as Manufacturing Production. The manufacturing figure is expected to show the same result as the previous month, at 0.3%. The Bank of England’s Inflation Report hearings are scheduled for Wednesday, and typically also provide a source of volatility during the question and answer event.
The Royal Bank of New Zealand will announce its policy cash rate on Thursday morning during roll-over. There is no expected change to the RBNZ’s cash rate, after the previous meeting saw the bank raise rates to a post-GFC high of 3.50% and signal a period of unchanged rates to assess the impact of the tightening cycle – economists strongly forecast no change at this meeting.
Following the NZ announcement, employment data will be released for Australia at the same time as Chinese CPI figures. Employment is expected to grow strongly, with 12,200 jobs expected to be added and the unemployment rate expected to tick down slightly to 6.3%. This report follows a shocking release last month which saw the unemployment rate skyrocket. There was indication was some of the jump was related to a change in the survey rather than a dramatic deterioration in conditions. Chinese CPI is expected to moderate even further to a low 2.2% from 2.3% previously.
The ECB did not disappoint in announcing further easing measures yesterday – if anything Draghi exceeded the expectations of the market in announcing two additional easing measures at the ECB meeting. The Euro plummeted over two cents yesterday to close below the psychological 1.3000 level, on the news that the ECB would further cut its policy interest rates and create an ABS purchase program to stimulate economic activity.
The interest rate cuts were the less expected of the two measures, with the ECB reducing all three of its policy interest rates by 0.10% (10 Basis points). This measure brings the rate on refinancing operations to a mere 0.05%, the marginal lending facility to 0.30% and the deposit facility – the rate charged on excess liquidity – to a blistering -0.20% – the changes come in to effect from September 10th. The negative rate is intended to cause discomfort for banks holding excess deposits with the ECB, with the hope that this will pressure them to provide loans rather than sitting on the excess liquidity.
More widely anticipated was the formulation of an Asset Backed Security Purchase Program (ABSPP). The ECB announced that it would be purchasing a portfolio of non-financial private sector asset backed securities in order to facilitate credit flows in the European economy. This is accompanied by a Covered Bond Purchase Program (CBPP3), in which the Eurosystem will purchase a portfolio of euro-denominated covered bonds. Both programs will be announced in more detail in early October, and are set to begin later that month.
With targeted LTRO programs scheduled for September and December, two easing programs announced for October and this month’s change to further cut interest rates it is no surprise that the Euro has been under heavy selling pressure since the May 8th ECB meeting – falling 1000 pips with little in the way of retracement.
With positioning still heavily short Euro and long the US Dollar a weak employment figure could provide the push needed for a short term reversal, though a weak data point would not necessarily indicate a reversal in the longer term trend of a US employment recovery. Economists expect the US economy added 226,000 new jobs last month, with the Unemployment rate expected to decrease slightly from 6.2% to 6.1%.
Pepperstone is happy to announce spot-trading on two additional metals: Platinum and Palladium.
Platinum is a semi-precious metal which is currently more valuable per ounce than Gold. While Gold is ever so slightly rarer in the earth’s crust, Platinum is produced in much smaller quantities. Platinum’s properties as the least reactive known metal and its lustre makes the silver metal highly sought after. Platinum’s major uses are found as a catalyst in cars and as jewellery. You can find Platinum in your trading terminal as the symbol XPT/USD
XPT/USD opens for trading at 01:00 server time and trades through to roll-over each day.
Palladium is a similar metal to Platinum in appearance and function, and is often used as a replacement for the dearer metal in jewellery and industrial uses. Palladium is produced almost entirely in Russia and South Africa and while the silver metal is the fifth rarest element in the earth’s crust, its production volumes exceed that of Platinum. Palladium finds most of its use, like Platinum, as a catalyst as well as in electronics and jewellery. You can find Platinum in your trading terminal as the symbol XPD/USD.
XPD/USD opens for trading at 01:00 server time and trades through to roll-over each day.
The Pepperstone Team.
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