Volatile week in currency markets ends with sharp stock market sell-off; G10 currencies fail to break out of recent ranges

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12 September 2016


A week rich in central bank meetings provided plenty of intraday volatility in currency markets. The Bank of Canada’s dovishness and the relatively hawkish comments from the Riksbank sent their respective currencies in opposite directions.

he Canadian Dollar was the worst G10 performer, whereas the Swedish Krona was the best, further evidence that Central Bank policies have become almost the only driver of currency markets.

More ambiguous was the reaction to a slightly less dovish than expected ECB meeting. No explicit extension of the QE program was announced, yet the Euro ended down for the day on Thursday. This tells us that last week’s move had more to do with position squaring than with any clear change in trend. The stock market swoon on Friday was blamed on the hawkish Fed commentary by Boston President Rosengren, but we find this explanation lacking as Rosengren didn’t add anything that wasn’t already known.

This week brings another batch of central bank meetings in Switzerland, Russia and Taiwan. Inflation in the UK and retail in the US will provide the main macroeconomic anchors for currency trading. Beyond FX, the key question will be the follow up in equity markets to the significant sell-off experienced by US stocks late Friday night.

Major Currencies in detail:


The key event for Sterling this week is the Bank of England meeting on Thursday. Consensus, including ours, looks for a 9-0 vote to keep policy unchanged. The short term news regarding the UK economic reaction to the Brexit vote has been more positive than expected, and we think that this is enough to stay the BoE’s hand. In our view, an absence of surprises in the investor’s report will also suffice to keep Sterling in the recent range of 1.32 to 1.34 for the rest of the week.


Initially, the USD had a rough time of it last week, as the services business survey declined to the lowest level since 2010. However, the mixed reaction to the ECB meeting and hawkish comments by Rosengren buoyed the dollar on Friday, even as they sent US equities into a nosedive.Tomorrow, all eyes will be on Fed voter Brainard’s speech, which marks the last chance for the Federal Reserve to set the tone for the September meeting. Retail sales will also provide timely information on the state of the US economy, though their extreme month-to-month volatility makes them one of the least reliable indicators.


Against most expectations, the ECB decided to delay a decision on prolonging QE beyond its March 2017 expiry. Surprisingly, the Euro, after some hesitation, ended the day down against the dollar, and continued to sell-off on Friday amid general risk aversion in US markets. The absence of market-moving events this week out of the Eurozone probably means the Euro will trade in reaction to what happens in the US, namely retail sales and the speech by Fed Governor Brainard on Monday.

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