Japanese Yen soars as safe-haven flight continues, ECB interest rate decision to be announced this afternoon
21/Jan/2016 • Currency Updates•
Investors continued to pile into safe-haven currencies on Wednesday after another sharp decline in oil prices to below $27 a barrel saw a further fall in risk appetite. The Japanese Yen subsequently climbed to a one-year high against the US Dollar, ending the session as the world’s best performing major currency.
Unsurprisingly, commodity-driven economies across the board saw their currencies plunge to new lows. The Russian Ruble, Mexican Peso and Norwegian Krone all experienced heavy losses during the course of the day. The Ruble in particular suffered the brunt of the latest oil price plunge, falling by 4% against the US Dollar to a fresh all-time low.
In the UK, the Pound’s recent dramatic decline took a breather for the day following encouraging unemployment figures that showed the jobless rate fell to its lowest level in a decade in the three months to November.
Across the Pond, inflation ticked upwards again in the US economy, boding well for future interest rate hikes in the US later this year. Meanwhile, the Bank of Canada defied the expectations of many by keeping its benchmark interest rate unchanged at 0.5% despite the overwhelmingly negative effect of the latest oil price plunge on the Canadian economy.
The busy week in the currency markets continues this afternoon, with European Central Bank President Mario Draghi set to speak at 1:30pm GMT following the Governing Council’s monetary policy meeting.
Major currencies in detail:
Sterling recovered modestly on Wednesday, climbing by 0.2% versus the US Dollar, remaining comfortably lower for the week.
Wednesday saw the release of yet another mixed labour report in the UK. On the positive side, unemployment declined unexpectedly for the fifth straight month in November, down to 5.1% from 5.2%, its lowest level since January 2006. This also marked the first time that the UK jobless rate had fallen back to its pre-crisis average since the global financial crash.
In contrast, average earnings growth continued its alarming decline. The figure excluding bonuses surprised to the upside, although still dipped to 1.9% from 2.0%, while including bonuses fell sharply from 2.4% to 2%. This will not be good news for Bank of England hawks, especially after comments from Mark Carney on Tuesday that suggested there needed to be a sustained increase in wage pressure before the central bank begins hiking rates. However, investors appeared to take positives out of the data, with the Pound rallying off recent lows during early morning trading.
The Euro dipped marginally ahead of today’s ECB meeting, ending the London session 0.1% lower against the Greenback.
Focus in the global currency markets today will undoubtedly be on the ECB and Draghi. This week’s ECB meeting looks set to be relatively low key, and we do not expect President Draghi to announce any additional easing measures following last month’s underwhelming lack of extra stimulus. Recent Euro strength and the latest rout in financial markets could, however, cause Draghi to strike a more dovish-than-expected tone in order to reiterate the Governing Council’s intention to do ‘whatever it takes’ to warn off deflation and prevent excessive Euro appreciation.
We do, however, expect Draghi to leave the door firmly open to further easing measures in the future, and continue to see a good chance that the ECB will expand its quantitative easing programme at some point in the first half of this year.
A mixed session for the Dollar saw the currency finish 0.1% higher against its major peers.
Inflation in the US continued to gradually tick upwards in December, weathering the effect of the Federal Reserve’s first interest rate hike in nine years. Consumer prices grew by 0.7% on an annualised basis last month, higher than the 0.5% recorded a month previous.
Critically, the level of core inflation, a more closely watched measure by the Fed, also increased last month, up to 2.1% from 2% in November. This now puts the level of core inflation above the central bank’s inflation target for the first time since 2012.
Economic data out of the US is relatively thin today, with jobless claims and the Philly Fed survey this afternoon the only major announcements.
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