Dollar ended the week as the strongest major currency after another week of dovish central bank driven volatilities. Euro dived to 11 year low against dollar and 7 year low against Sterling as ECB's quantitative easing program far exceeded market expectations. The common currency was additionally weighed down by uncertainties over Greek election this Sunday. Sterling also resumed recent down trend against the greenback after the dovish BoE minutes. The biggest surprise could indeed be BoC which cut interest rates by 25bps and sent USD/CAD to 6 year high. Aussie and followed others low on speculations that the global easing campaign could force RBA to cut rates as early as in February. In stock markets, US equities were bounded in recent range as central bank impacts were offset by earnings. Meanwhile European indices were generally firm, in particular with DAX made new record high follow ECB. Gold extended recent rebound but started to lose momentum as it hit 1300 handle. Crude oil stayed soft in tight range.
Here are some recap of major central activities. Exceeding the consensus forecast, ECB's expanded asset purchase program would spend EUR 60b per month, from March 2015 through September 2016, in both public and private debts. The program aims at combating deflation and would continue until "a sustained adjustment in the path of inflation" is seen. Meanwhile, the central bank decided to change the pricing of the 6 targeted longer-term refinancing operations (TLTROs) remaining in the market and left the policy rates unchanged. The ECB indicated that the key reasons for the decision were to fight against deflation as "inflation dynamics have continued to be weaker than expected". Moreover, the central bank acknowledged that "while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results". This suggested that stimuli adopted were "insufficient to adequately address heightened risks of too prolonged a period of low inflation". More in ECB Decided to Buy Asset Worth of 60B euro a Month, March through September 2016.
Surprisingly, the BOC announced to cut its overnight rate to 0.75% from 1% in January so as to insure against the risks of further decline in oil prices on inflation and financial stability. Policymakers saw downward pressure on headline inflation from lower energy prices while upward pressure could come from depreciation of Canadian dollar. On net, they were more concerned about the downside risks and focused on the 'material slack' remaining in the economy. The BOC also revised lower its growth and inflation outlook, suggesting further easing cannot be ruled out in coming months. More in BOC Cut Rates, Insuring Against Headwind Posed By Oil Price Decline.
BOE policymakers dropped rate hike calls as inflation disappointed in recent months. The January minutes indicated that the MPC voted unanimously to keep the Bank rate unchanged at 0.5%, compared with 2 members favoring higher rates over the past several meetings. The members also decided in unity to keep asset purchases at 375B pound. The British pound declined against major currencies after the news as rate hike speculations dampened. More in Unanimous Vote To Keep Rate Unchanged Damped Speculations Of BOE Tightening.
BoJ maintained its monetary policy unchanged in January but trimmed both growth and inflation outlooks. The central bank cut its core CPI forecast, for the current year ending March 2015, to 0.9% from previously projection of 1.2%. Core CPI for fiscal year 2015/16 was revised lower to 1% from 1.7% previously estimated. Real GDP growth forecast GDP for the current year stayed unchanged at 0.5%. Yet, the outlook for the next financial year was trimmed to 2.1% compared with 1.5% previously.
Dollar index rose to as high as 95.48 last week and is now close to 50% retracement of 121.02 (2001 high) to 70.69 (2008 low) at 95.85. Near term outlook stays bullish as long as 92.15 support holds. Based on current momentum, the up trend from 70.69 should at least extend to 61.8% retracement at 101.79 and above
