ECB will keep rates at record lows for the next one year, provide unlimited funding to banks and keep up asset purchases albeit at a lower size. ECB is providing the backstop for markets in search of risk and this will drive currencies in the next one year.
Euro depreciated by 1.49% against the USD last week after the European Central Bank, in its policy meet on Thursday, said it would extend its bond purchases at a reduced rate. ECB will cut asset purchases to 30 billion euros from 60 billion euros starting January while extending the scheme by 9 months to September next year. Pace of QE tapering is in line with the market expectations.
USD traded higher against all of the major currencies last week. The Australian dollar experienced the steepest losses. The Japanese yen and British pound were the only currencies that managed to hold somewhat steady in the face of USD’s gains. Nearly every piece of U.S. data released over the past week were better than expected but good data was not the only reason for the USD rise. The Republican Party made substantial progress on tax reforms with the House passing the budget, which clears the way for the House GOP leader to release a draft of the tax bill next Wednesday. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 1.30% on a week on week basis and is at a level of 94.92.
USD started the week on a high note after Prime Minister Shinzo Abe’s ruling party scored a big win in Sunday’s election, keeping its two-thirds majority in the lower house. Election victory eased fears that the economic steps implemented under Abe’s leadership – such as easy monetary policy would be disrupted, and halted the yen’s depreciation against the USD.
USD edged lower on Tuesday as market shifted it’s attention to who will be the next head of the Federal Reserve. President Donald Trump told reporters on Monday that he is very close to a decision on who should chair the Federal Reserve after interviewing five candidates for the position. However, on Wednesday, USD traded higher, the gain was largely underpinned by the market speculation that Republican senators were favouring John Taylor to become the next head of the U.S. Federal Reserve.
U.S. durable goods rose for a second straight month in September, beating analyst expectations and supporting the view of steady economic growth. Data showed that U.S. durable goods order rose 2.2% in the month of September from 2.0% growth seen in August, against the expectation of 1% growth.
U.S. domestic new home sales unexpectedly reached a near decade high in September. Data showed that U.S. New Home sales rose to 667,000 in the month of September against the expectation of 555,000, followed by 561,000 in August.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 21st October rose by 10,000 to 233,000 from previous week’s total of 223,000 against the expectations of a rise by 12,000 to 235,000.
US GDP data showed that the U.S. economy had expanded by an annual rate of 3.0% growth in the third quarter against the expectation for the growth to ease to 2.5% due to Hurricanes Harvey and Irma.
Asian currencies were broadly lower last week against the USD. Australian Dollar depreciated by 1.79%, New Zealand Dollar depreciated by 1.22%, Japanese Yen depreciated by 0.13% against the USD and appreciated by 1.36% against the Euro. South Korean Won appreciated by 0.09%, Philippines Peso depreciated by 0.53%, Indonesian Rupiah depreciated by 0.66%, Indian Rupee depreciated by 0.02% against the USD and appreciated by 1.14% against the Euro, Chinese Yuan depreciated by 0.45%, Malaysian Ringgit depreciated by 0.4% and Thai Baht depreciated by 0.11%.