Central Banks Dominate FX Price Action

The European Central Bank meets tomorrow, and that is the main event of the week. The price action today is dominated by other central banks. The market is still struggling to find a new balance after the Swiss National Bank’s surprising move last week.  

The franc remains volatile against bot the dollar and euro. The franc has gained 1.3% against the dollar and is the strongest currency today. The fact that its balance sheet is 80% of GDP, at least three times the proportionate size of the Fed and BOE’s balance sheet and the deeper negative rates are not discouraging new buying–assuming any shorts have been forced out. 

The focus today, however, is on other central banks. The yen is the second strongest of the majors, gaining almost 1%. The dollar’s recovery from last week’s JPY115.85 low ran out of steam at the 20-day moving average just below JPY119.0, which also coincides with a 61.8% retracement of the dollar’s decline from the JPY120.75 high seen on January 2.  

The take away from the BOJ meeting is not going to rush into any strong action to offset the inflationary impact of falling energy prices.  It did extend two lending facilities, but BOJ Kuroda denied intentions to cut the deposit rate, which we had thought was possible.  As expected, the BOJ cuts its forecast for CPI in the FY15 to 1% from the 1.7% forecast in October. Optimistically it would appear, the BOJ revised up growth to 2.1% from 1.5% FY15 and to 1.6% from 1.2% in FY16. Interestingly, the BOJ’s forecast is based on oil prices rising from $55 to $70 a barrel by the end of FY16.

Sterling is the weakest of the major currencies.  It fell a cent from its high near $1.5180 in response to the somewhat unexpected news that the two hawks on the MPC capitulated. The BOE’s decision to keep rates on hold earlier this month was a unanimous decision (9-0).   In the middle of last month, one of the hawks Weale, reiterated his stance that a rate hike was needed.