21/11/2014: Dovish global central banks driving forex volatility

For a day with all but nothing in the economic calendar (sorry Canada) forex majors have been remarkably volatile today. The euro is well over 100 pips down on the day (obviously helping to drive the Swissy also strongly lower), whilst the Aussie and Kiwi dollars are also strongly higher. The sudden sharp moves have been driven firstly by comments from Mario Draghi and subsequently a series of dovish measures implemented by the People’s Bank of China.

doves

Volatility has returned to the euro. After around two weeks of drifting higher towards $1.2600, the euro has suddenly dropped over 100 pips and almost 1% on the day. Today, ECB president Mario Draghi has given a speech in Frankfurt. Draghi is striking an increasingly dovish tone recently. Today he noted that falling inflation expectations were increasingly concerning and that the ECB would need to act quickly to do everything in its power to raise expectations. Following on from his recent re-iteration of doing “whatever it takes”, Draghi noted that the ECB would do everything within its mandate to prevent inflation expectations from falling.

This speech was nothing ground breaking from Draghi, but he is increasingly pointing towards the use of QE (i.e. Eurozone sovereign debt purchases) to help the issue. The market is clearly taking Draghi’s increasing assertion on the point that full blown QE is in the pipeline. At some stage Draghi will have to actually deliver on his promise but for now euro traders are convinced. EUR/USD dropped sharply, whilst the cap on EUR/GBP that I discussed yesterday has been strengthened by today’s speech. The other bi-product has been the sharp gains on Eurozon stock indices. The DAX and CAC are both 2% higher, whilst the FTSE 100 has been dragged up 1% by the boot straps.

The EUR/USD chart has already had a look at the reaction lows just under $1.2400, but with the momentum of the 2 week drift higher clearly now being lost, the prospect of a retest of $1.2357 is now high.

PBOC

The other key moves in today’s forex moves have come following a decision by the PBOC to engage in a series of monetary policy loosening measures. The bank has cut its deposit rate from £% to 2.75%; cut its lending rate from 6% to 5.5%. These have been the first interest rate cuts since July 2012. The reaction to the commodity currencies (Aussie and Kiwi) were instant. Both currencies (but specifically the Aussie) move sharply on Chinese economic data and today has been no different.

The Aussie is now up 1% and reverses a trend of recent weakness. Short positions on the Aussie have been hammered near term but whether this will change the outlook completely is too early to say. The measures by the PBOC could drive demand for oil (Brent Crude and WTI are both up 2.4 today and are breaking their recent bearish trends) with the Kiwi dollar also reacting higher. Again, the outlook for the Kiwi is still fairly up in the air, with the key near/medium term resistance at 0.8033 the major barrier to gains.

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