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FX Friday – Global Currency Review & Forecast for 3-11-16

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Markets React to European Central Bank Mega Stimulus

The week was relatively uneventful and directionless until Thursday when the European Central Bank (ECB) announced a new round of stimulus to combat sluggish growth and deflationary pressures building in the Eurozone. Markets reacted as expected following the announcement with the Euro and gold falling and the US Dollar and equities gaining. Within an hour or so all the losses and gains reversed. Stock plummeted, the Euro and gold soared and the Dollar tanked.

Central bank stimulus no longer has the same straight forward predictable salubrious impact on markets. After years of quantitative easing, artificially low interest rates, no interest rates and negative interest rates, some market participants sense that doing more of the same may not help, while others cheer on central bank efforts. The battle whether the ECB stimulus program, which involved lowering of key interest rates and more bond buying (including corporate bonds), will have the desired effect played itself out in the market on Thursday as the Dow Jones swung 300 points from its lows to its highs and the Euro fell nearly two percent and then rose about three percent from its lows.

It will probably take a few more trading days to get a sense of the direction of all markets post ECB announcement.

Here is a recap of recent market activity:

Week Ended March 4, 2016

The U.S. Dollar Index* closed the week ended March 4, 2016, at 97.22 up from 96.63 on February 26, 2016.

Oil closed the week ended March 4, 2016 at $36.33 up from $33.54 on February 26.

Gold finished the week at $1259.10 an ounce on the week up from $1221.80 the prior week and silver closed the week at $15.51 up from $14.67 the prior week.

Week Ended March 11, 2016

On Monday, the dollar and gold opened higher on Chinese stimulus plans. The Dollar Index was at 97.56 in early morning trade, gold up $12 to $1271, silver up $.17 at $15.67 and oil up $.57 to $36.49 a barrel.

The Rouble rose to a 2016 high on higher oil prices and the prospect of cooperation among oil producing nations to freeze production.

Gold and silver held their gains and closed at $1267 and $15.64, respectively. The Dollar Index fell to 97.09 and and crude oil tacked on more gains, closing at $37.92 a barrel.

On Tuesday gold and silver opened lower as did equities. The Dollar Index opened at 96.51 and oil fell to $35.09 a barrel after rising sharply in recent trading sessions.

Gold opened down at $1261 an ounce and silver down to $15.64 an ounce. Oil rebounded slightly during the day and closed lower oil at 36.31 on nagging over supply concerns The Dollar Index closed higher at 97.21 in anticipation of further ECB stimulus.

The Brazilian Real gained as their central bank added liquidity and on reports that scandal ridden President Dilma Rousseff may be driven from office.

The British pound fell further on Brexit fears.

Weak Chinese trade data lifted the Swiss Franc and Japanese Yen.

On Wednesday oil rose again on talks of production cuts. Gold fell as did silver. The Dollar Index rose and the Euro fell as investors awaited Thursday’s ECB meeting.

New Zealand cut rates unexpectedly and the New Zealand Dollar plunged against the US Dollar.

The Canadian Dollar continued to rise on higher oil prices and the Bank of Canada’s decision ot keep rates at 0.5%.

Venezueala announced a plan to introduce dual forex rate with a fixed and floating rate Bolivar.

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On Thursday the European Central Bank announced a fresh round of stimulus. The Dollar Index soared to 97.98 on the announcement and oil fell to 38.11. Gold and silver fell from $1246.80 and $15.27 then reversed with an hour of the announcement to $1266 and $15.52, respectively. Gold and silver held their gains on Thursday and rose in the aftermarket to $1280 and $15.70. The Dollar Index fell during the market reversal to 96.02 from a peak of over 98.00 and closed at 96.19.

Initial weekly U.S. jobless claims data was released. Claims were 259K better than the expected 275K. Reuters reported that “labor market was strengthening”. This report had little of no impact on marketss

On Friday morning gold and silver fell to $1266 and $15.56 an ounce, respectively, off their Thursday evening highs. The Dollar Index recovered to 96.51 and European equities and U.S. equity futures were higher.

On Friday it was reported that U.S. import prices fell 0.3% vs. expectations of 0.7%. While the number was not as deflationary as expecetd, it was the 18th month in a row that U.S. import prices fell. The Fed has an “inflation target of 2%” and has stated that further rate hikes are partially dependent on the Fed’s expectations that they will achieve that target. Lower import prices put the Fed further away from their inflation target.

What’s Next?

Next week the Fed will issue its interest rate decision. Observers will be looking to see what, if any measures, the Fed might take to offset the ECB stimulus action taken earlier this week. A rate hike is not expected and the lowering of interest rates by the ECB takes some pressure off the Fed to hint strongly that a rate hike might happen at their next meeting in June.

Key producer and consumer price index readings are scheduled for release next week.

Reports that could impact currency movements next week:

Mar 15 Retail Sales Feb
Mar 15 Retail Sales ex-auto Feb
Mar 15 PPI Feb
Mar 15 Core PPI Feb
Mar 15 Empire Manufacturing Mar
Mar 15 Business Inventories Jan
Mar 15 NAHB Housing Market Index Mar
Mar 15 Net Long-Term TIC Flows Jan
Mar 16 MBA Mortgage Index 03/12
Mar 16 CPI Feb
Mar 16 Core CPI Feb
Mar 16 Housing Starts Feb
Mar 16 Building Permits Feb
Mar 16 Industrial Production Feb
Mar 16 Capacity Utilization Feb
Mar 16 Crude Inventories 03/12
Mar 16 FOMC Rate Decision Mar
Mar 17 Initial Claims 03/12
Mar 17 Continuing Claims 03/05
Mar 17 Philadelphia Fed Mar
Mar 17 Current Account Balance Q4
Mar 17 Natural Gas Inventories 03/12
Mar 18 Mich Sentiment

Year to Date Dollar Index, Oil and Gold Prices

bgasc gold vs dollar and oil march 11

* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.

This article does not necessarily reflect the explicit views of BGASC, nor should it be construed as financial advice.