G10 FX Weekly – ECB pushes euro down

by: Georgette Boele , Roy Teo

G10-FX-weekly-22-October-2015.pdf (145 KB)
  • ECB pushes down the euro
  • Meanwhile, the US dollar firms ahead of FOMC and Q3 GDP
  • Canadian dollar slides as GDP downgraded


Dovish ECB pushes down euro

In ECB’s press conference, President Draghi struck a very dovish tone, which pushed down the euro. Draghi signaled strongly that QE will be stepped up in December. Moreover, he said that a deposit rate cut was also being discussed as one of the possibilities. During the press conference EUR/USD dropped from above 1.13 to below 1.12 or more than 1%. Our base case, which we call QE Plus, is that the ECB will both step up and extend its QE programme at the December meeting. This should weigh on the euro while the further pricing out of a Fed rate hike this year should balance the ECB’s action. Therefore, our target for EUR/USD for the end of 2015 is 1.12.

US dollar firms ahead of FOMC and Q3 GDP

The US dollar recovered in the past week as FOMC meeting on 28 October and US Q3 GDP on 29 October come into focus. The FOMC is widely expected to keep monetary policy unchanged, though their forward guidance will be crucial for the US dollar’s direction. A signal by the FOMC that a rate hike is still on for this year and/or a stronger than expected US GDP reading, will likely support the dollar across the board. However, our base case is that the Fed will delay, which should limit the US dollar’s upside.

Canadian dollar slides as BoC downgrades GDP forecast

The Canadian dollar (CAD) moved higher after the Liberal party and their leader Trudeau won the general elections and promised to stimulate the economy via infrastructure spending. But lower oil prices and a more dovish Bank of Canada (BoC) weighed on the CAD. However, the BoC signaled that it is unlikely to ease monetary policy rates any time soon as the full effects of 50bp rate cuts earlier this year have not fully filtered through the economy. Hence, we now think that the BoC will keep monetary policy unchanged in 2015 and 2016 (in line with the market), compared to our previous call for a 25bp rate cut this year. Nevertheless, we maintain our view that the CAD will underperform against the US dollar due to growth and monetary policy divergence between the US and Canada

BoJ to keep QQE unchanged, dovish bias

We expect the Bank of Japan (BoJ) to keep monetary policy unchanged next week on 30 October. This is widely priced in by financial markets given that short term implied volatility in USD/JPY remains low. However, we expect the BoJ to signal that risks to their inflation target of 2% by the second half of 2016 have increased. Hence this would pave the way for an enhancement of BoJ’s qualitative and quantitative (QQE) easing program by early 2016. We expect the JPY to decline to 122 and 135 against the US dollar by the end of 2015 and 2016, respectively, as interest rate differentials between the US and Japan widen.

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