Commodity currencies staged a strong comeback last week and stocks extended recent rebound. DJIA closed the week at 17084.49, up 612.12 pts. S&P 500 closed at 2014.89, up 142.98 pts. Commodities also performed well with Gold up slightly at 1155.9 but managed to stand above 1150 handle. Crude oil's rise was more impressive as it broke out of recent range and breached 50 handle to 50.92 before closing at 49.49. While Canadian was lifted by strength in oil prices, Aussie ended as the strongest one as RBA maintained a neutral stance, rather than turning dovish on recent developments in China. Meanwhile, Yen was the weakest major currency on risk appetite. Dollar followed closely as traders were getting less and less convinced of a December Fed rate hike.
There were a number of central bank activities last week and here is a recap. The FOMC minutes for the September meeting unveiled that concerns over the global economic outlook had made policymakers decide to keep rates unchanged. They believed it was 'prudent to wait' for more information to confirm that the economic outlook had 'not deteriorated' and that inflation would gradually return to +2% over the medium term. Some Fed members suggested after the meeting that a rate hike decision was a close call. However, we do not get such feeling after reading the minutes. We saw some participants were considering raising the policy rate by the end of this year, rather than in September. In order to emphasize the worry over the global economic outlook, the minutes even added a risk statement that 'recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term'. More in Concerns Over Global Economic Slowdown Refrained Fed From Raising Rates.
Similar to the Fed's, the ECB minutes for the September meeting showed that the policymakers were concerned about the global economic outlook, especially slowdown in China and other emerging markets. The Governing Council generally agreed that downside risks to Eurozone's recovery and inflation have increased, as a result of lower commodity prices, a stronger euro and a lower growth prospect. The central bank reiterated that the monthly asset purchases of 60B euro would be fully implemented until the end of September 2016, and beyond if necessary. The minutes stressed that 'a substantial degree of accommodation was still in the pipeline'. More in ECB Saw More Downside Risks To Growth And Inflation
Same as August and September, the BOE voted 8-1 to keep the Bank rate unchanged at 0.5% and decided unanimously to leave the asset purchase program at 375B pound. Ian McCafferty remained the only member favoring a rate hike of +25 bps is warranted. He suggested that "the likely prospective increase in domestic costs was sufficient to justify an immediate increase in Bank Rate". While acknowledging the slowdown in emerging market economies, the members refrained from over-worrying about the situation in China. Domestically, growth might ease in the third quarter. The BOE now expects inflation to rise more gradually than it stated in the August Inflation report. This is probably an indication that interest rates would stay low for longer. More in BOE Kept Bank Rate Unchanged, Forecast Inflation to Pick Up More Gradually.
RBA kept the cash rate unchanged at 2.00% in October. The accompanying statement contained few changes, suggesting that policymakers' view on the economic outlook stayed largely the same as the previous month. The updates, however, indicated that the central bank has turned more confident over the growth outlook. It also hinted that more regulatory measures have been implemented to contain the housing price surge in Sydney, as well as Melbourne. We retain the view that the RBA would leave the monetary decision unchanged for the rest of the year. RBA Left Rate Unchanged, More Confident Over Domestic Developments
BoJ left monetary policy unchanged as expected. Interest rate was held near to zero while the target for monetary base expansion is kept at JPY 80T annually. Most importantly, the central dropped no hints on further easing in today's statement. BoJ noted that "Japan's economy continues to recover moderately although exports and production have been affected by the slowdown in emerging economies." BoJ governor Haruhiko Kuroda said that "Consumer prices are expected to stay around zero percent from a year earlier because of falling energy prices, but I think prices will gain upward momentum toward a 2 percent target once the impact of falling energy prices disappear."
Regarding trading strategies, AUD/JPY rebounded last week and thus, our sell of break of 81.94 was not filled. Meanwhile, In spite of a retreat, EUR/GBP was held at 0.7332, above our stop of 0.7300. We'll hold on to the EUR/GBP long position with stop moved up slightly to 0.7330.