Central banks take centre stage

After a relatively quiet start in terms of FX price action, volatility picked up towards the back end of the week as central bank related news came to the fore curtesy of the ECB and PBoC. Thursday saw the latest ECB rate decision and while the central bank kept rates on hold as expected by all surveyed analysts, ECB president Draghi struck a dovish tone in his accompanying press conference. ECB’s Draghi stated that the central bank is set to discuss whether additional action is needed in December and that they are ready to expand the QE programme if needed. Other notable highlights of the press conference include ECB’s Draghi stating that downside remains in inflation and GDP and that a lowering of the deposit rate was discussed and that some members wanted to take action today.

As such, substantial downside was seen in the EUR, which fell around 3 points against the USD over the rest of the week in the wake of the press conference. As well as initial weakness in EUR, the dovish comments also saw a bout of carry trades and supported countries with higher yields with NZD/USD breaking above 0.6800, however failing to sustain the move. Next week could prove to be another busy week in Europe, with Germany releasing the latest IFO, inflation and unemployment data, while the Eurozone inflation and unemployment is also set for release.

The other notable move this week came from the PBoC, with the central bank cutting the 1 year lending rate by 25bps from 4.60% to 4.35%, 1 year deposit rate by 25bps from 1.75% to 1.5% and RRR by 50bps from 18.0% to 17.5% with an additional 50bps cut for qualifying institutions in an unscheduled release, while the PBoC also remove banks' deposit rate ceiling. Some had forecast this move by the central bank happening before the turn of the year, however the timing came as a surprise to many and as such, upside was seen in many emerging and commodity currencies, particularly AUD, while further divergence was seen between CNH and CNY.

Of note, analysts at Deutsche Bank note that the action by the PBoC will provide additional global easing and as such make it more likely that the Fed will be able to raise rates. This comes ahead of Wednesday’s FOMC rate decision, with markets pricing in just a 9% probability of a rate hike.

Elsewhere next week, the other notable highlight comes in the form of the BoJ rate decision, with many expecting the central bank to expand their QQE programme. However doubts regarding expansion were exacerbated today as Japan PM adviser Honda stated that there is no need for additional easing by the BoJ at this stage, which saw immediate strength go through the JPY.